SYNAGRO TECHNOLOGIES INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

OR

|| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER 0-21054

SYNAGRO TECHNOLOGIES, INC.
(Exact name of Registrant as Specified in its Charter)

DELAWARE 76-0511324
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)

1800 BERING DRIVE, SUITE 1000 77057
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)

Internet Website -- www.synagro.com

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(713) 369-1700

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Common Stock, $.002 par value
Preferred Stock Purchase Rights
(Title of each class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No ||.

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ||

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Securities Exchange Act of 1934 Rule 12b-2).Yes || No |X|.

The aggregate market value of the 18,440,140 shares of the Registrant's
common stock held by nonaffiliates of the Registrant was $46,653,554 on June 30,
2003, based on the $2.53 last sale price of the Registrant's common stock on the
Nasdaq Small Cap Market on that date.

As of March 29, 2004, 19,775,821 shares of the Registrant's common stock
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Proxy Statement for the 2004 Annual Meeting of Stockholders of the
Registrant (Sections entitled "Election of Directors," "Management
Stockholdings," "Principal Stockholders," "Executive Compensation," "Option
Exercises and Year End Values," "Employment Agreements," "Equity Compensation
Plans," "Compensation Committee Report," "Common Stock Performance Graph" and
"Certain Transactions") is incorporated by reference in Part III of this Report.

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PART I

ITEM 1. BUSINESS

FORWARD-LOOKING STATEMENTS

We are including the following cautionary statements to secure the
protection of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 for all forward-looking statements made by us in this Annual
Report on Form 10-K. Forward-looking statements include, without limitation, any
statement that may predict, forecast, indicate, or imply future results,
performance, or trends, and may contain the words "believe," "anticipate,"
"expect," "estimate," "project," "will be," "will continue," "will likely
result," or words or phrases of similar meaning. In addition, from time to time,
we (or our representatives) may make forward-looking statements of this nature
in our annual report to shareholders, proxy statement, quarterly reports on Form
10-Q, current reports on Form 8-K, press releases or in oral or written
presentations to shareholders, securities analysts, members of the financial
press or others. All such forward-looking statements, whether written or oral,
and whether made by or on our behalf, are expressly qualified by these
cautionary statements and any other cautionary statements which may accompany
the forward-looking statements. In addition, the forward-looking statements
speak only of the Company's views as of the date the statement was made, and we
disclaim any obligation to update any forward-looking statements to reflect
events or circumstances after the date thereof. Forward-looking statements
involve risks and uncertainties which could cause actual results, performance or
trends to differ materially from those expressed in the forward-looking
statements. We believe that all forward-looking statements made by us have a
reasonable basis, but there can be no assurance that management's expectations,
beliefs or projections as expressed in the forward-looking statements will
actually occur or prove to be correct. Factors that could cause actual results
to differ materially are discussed under "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Risk Factors Which May Affect
Future Results."

RESTATEMENT OF 2002 AND 2001 FINANCIAL STATEMENTS

In our financial statements for the years ended December 31, 2002 and
2001, we deducted our preferred stock dividends related to our redeemable
preferred stock from our accumulated deficit in our consolidated balance sheets
and our consolidated statements of stockholders' equity. We recently became
aware that Securities and Exchange Commission ("SEC") rules require that when a
company has an accumulated deficit, preferred stock dividends should be deducted
from additional paid in capital. Therefore, we have revised our financial
statements to deduct preferred stock dividends previously charged to accumulated
deficit from additional paid in capital. This revision has no impact on our
total consolidated stockholders' equity. The revision also had no effect on our
consolidated statements of operations or statements of cash flows for 2002 or
2001.

This table recaps the adjustments related to the revision of our preferred
stock dividends for the periods presented (in thousands):

Our financial statements for the year ended December 31, 2001, were
audited by Arthur Andersen LLP, who issued an unqualified opinion on our 2001
financial statements. Since Arthur Andersen has ceased operations, they are no
longer available to audit the revised reporting of the preferred stock dividends
and re-issue their audit report. As we were unable to have the adjustments
pertaining to our 2001 financial statements audited by our filing deadline, the
Arthur Andersen unqualified opinion has been removed and our 2001 financial
statements and related note disclosures contained herein are unaudited and are
labeled as such. As a result, this Annual Report on Form 10-K does not
completely satisfy the financial statement requirements of Regulation S-X.

Since we are unable to file three years of audited financial information
in this 2003 Annual Report on Form 10-K as required under Rules 3-01 and 3-02 of
Regulation S-X, our reports filed under the Securities Exchange Act of 1934 (the
"Exchange Act") will not be in full compliance with the requirements of the
Exchange Act. As a result, the effectiveness of our Registration Statement on
Form S-8 (No. 333-64999) will be suspended, we will be unable to issue shares
under our stock option plans and agreements. In addition, we will not be in
compliance with Item 13(a) (1) of Schedule 14A under the Exchange Act in
connection with our solicitation of proxies for our 2004 annual meeting of
shareholders. During any period when we are not current with our SEC reports,
neither our affiliates nor any person that purchased shares from us in a private
offering during the preceding two years will be able to sell their shares in
public markets pursuant to Rule 144 under the Securities Act of 1933.

Because of the recent identification of this issue, it was impracticable
to complete a re-audit of our 2001 financial statements by our filing deadline.
While the consolidated financial statements for 2001 are unaudited, they include
all adjustments (consisting of a normal and recurring nature) that are, in the
opinion of management, necessary for a fair presentation of the financial
condition, results of operations, and cash flows for that year. The consolidated
financial statements for the fiscal years ended 2003 and 2002 have been audited
by PricewaterhouseCoopers LLP.

BACKGROUND

We generate substantially all of our revenue by providing water and
wastewater residuals management services to municipal and industrial customers.
We provide our customers with complete, vertically integrated services and
capabilities, including facility operations, facility cleanout services,
regulatory compliance, dewatering, collection and transportation, composting,
drying and pelletization, product marketing, incineration, alkaline
stabilization, and land application. We currently serve more than 1,000
customers in 37 states and the District of Columbia. Our contracts typically
have inflation price adjustments, renewal clauses and broad force majeure
provisions. In 2003, we experienced a contract retention rate (both renewals and
rebids) of approximately 86 percent.

We categorize our revenues into five types -- contract, purchase order
(PO), product sales, design\build construction and event work.

Contract revenues are generated primarily from land application,
collection and transportation services, dewatering, incineration, composting,
drying and pelletization services and facility operations and maintenance, and
are typically performed under a contract with terms ranging from 1 to 25 years.
Contract revenues accounted for approximately 83 percent and 81 percent of total
revenues in 2003 and 2002, respectively.

Purchase order revenues are primarily from facility operations,
maintenance services, and collection and transportation services where services
are performed on a recurring basis, but not under a long-term contract. Purchase
order revenues accounted for approximately three percent and four percent of
total revenues in 2003 and 2002, respectively.

Product sales revenues are primarily generated from sales of composted and
pelletized biosolids from internal and external facilities. Revenues from
product sales accounted for approximately five percent and four percent of total
revenues in 2003 and 2002, respectively.

Design\build construction revenues are derived from construction projects
where we act as the general contractor to design and build a biosolids facility
such as a drying and pelletization facility, composting facility, incineration
facility or a dewatering facility. Revenues from construction projects accounted
for approximately two percent and four percent of total revenues in 2003 and
2002, respectively.

Event project revenues are typically generated from digester or lagoon
cleanout projects and temporary dewatering projects. Revenue from event projects
accounted for approximately seven percent of total revenues in 2003 and 2002.

Revenues under our facilities operations and maintenance contracts are
recognized either when wastewater residuals enter the facility or when the
residuals have been processed, depending on the contract terms. All other
revenues under service contracts are recognized when the service is performed.
Revenues from design/build construction projects are accounted for under the
percentage-of-completion method of accounting. We provide for losses in
connection with long-term contracts where an obligation exists to perform
services and it becomes evident that the projected contract costs will exceed
the related revenue.

Our costs relating to service contracts include processing,
transportation, spreading and disposal costs, and depreciation of operating
assets. Our spreading, transportation and disposal costs can be adversely
affected by unusual weather conditions and unseasonably heavy rainfall, which
can temporarily reduce the availability of land application. Material must be
transported to either a permitted storage facility (if available) or to a local
landfill for disposal. In either case, this results in additional costs for

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transporting, storage and disposal of the biosolid materials versus land
application in a period of normal weather conditions. Our costs relating to
construction contracts primarily include subcontractor costs related to design,
permit and general construction. Our selling, general and administrative
expenses are comprised of accounting, information systems, marketing, legal,
human resources, regulatory compliance, and regional and executive management
costs. Historically, we have included amortization of goodwill resulting from
acquisitions as a separate line item in our income statement. Effective January
1, 2002, goodwill is no longer amortized in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets," and the line item will contain only
amortization of intangibles and acquisition-related costs for the year ended
December 31, 2003.

RESULTS OF OPERATIONS

The following table sets forth certain items included in the Selected
Financial Data as a percentage of revenue for the periods indicated (in
thousands):

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
2003 2002 2001
------------------- ------------------ ------------------
(unaudited)

Revenue ................................................... $ 298,552 100.0% $ 272,628 100.0% $ 260,196 100.0%
Cost of services .......................................... 234,451 78.5% 201,880 74.0% 191,921 73.8%
--------- ------- --------- ------- --------- ------
Gross profit .............................................. 64,101 21.5% 70,748 26.0% 68,275 26.2%

Selling, general and administrative expenses .............. 26,070 8.7% 22,935 8.4% 21,784 8.4%
Reorganization costs ...................................... 1,169 0.4% 905 0.4% -- --
Special credits, net ...................................... -- -- -- -- (4,982) (2.0)%
Amortization of intangibles ............................... 450 0.2% 108 -- 4,489 1.7%
--------- ------- --------- ------- --------- ------
Income from operations .................................. 36,412 12.2% 46,800 17.2% 46,984 18.1%
--------- ------- --------- ------- --------- ------
Other (income) expense:
Other (income) expense, net ............................. 77 0.0% 5,454 2.0% (221) (0.1)%
Interest expense, net ................................... 23,356 7.9% 23,498 8.6% 26,968 10.4%
--------- ------- --------- ------- --------- ------
Total other expense, net ............................. 23,433 7.9% 28,952 10.6% 26,747 10.3%
--------- ------- --------- ------- --------- ------
Income before provision for income taxes .................. 12,979 4.3% 17,848 6.6% 20,237 7.8%
Provision for income taxes .............................. 5,225 1.7% 6,784 2.5% 573 0.2%
--------- ------- --------- ------- --------- ------
Net income before cumulative effect of change in
accounting for derivatives and asset retirement
obligations and preferred stock dividends ............... 7,754 2.6% 11,064 4.1% 19,664 7.6%
Cumulative effect of change in accounting for
derivatives ............................................. -- -- -- -- 1,861 0.8%
Cumulative effect of change in accounting for asset
retirement obligations .................................. 476 0.2% -- -- -- --
--------- ------- --------- ------- --------- ------
Net income before preferred stock dividends ............... 7,278 2.4% 11,064 4.1% 17,803 6.8%
======= ======= ======
Preferred stock dividends ............................... 8,209 7,659 7,248
--------- --------- ---------
Net income (loss) applicable to common stock ............ $ (931) $ 3,405 $ 10,555
========= ========= =========

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

For the year ended December 31, 2003, revenue was approximately $298.6
million compared to approximately $272.6 million for 2002, an increase of
approximately $26.0 million, or 9.5 percent. Approximately $25.0 million of the
increase in revenues relates to increased volume from service and maintenance
contracts and approximately $6.2 million of the increase in revenue relates to
acquisitions. The increase in revenues from contracts and acquisitions was
partially offset by a decrease of approximately $6.3 million related to
design/build contract revenues as projects were completed in the first half of
2003 and were expected to be replaced by the Honolulu project, which was delayed
beyond 2003.

Gross profit for the year ended December 31, 2003, was approximately $64.1
million compared to approximately $70.7 million for 2002, a decrease of
approximately $6.6 million, or 9.3 percent. Gross profit as a percentage of
revenue decreased to 21.5 percent in 2003 from 26.0 percent in 2002. The
decrease in gross profit from 2003 to 2002 is primarily due to
higher-than-expected handling, storage and disposal costs due to unusually
inclement weather incurred primarily in the first half of the year that could
not be passed to the customer and cost overruns on certain one-time event
projects. Additionally, gross profit in 2003 was negatively impacted by higher
repairs and utilities costs of $2.3 million. The settlement of the Riverside
litigation resulted in an increase of $0.7 million in depreciation expense,
which impacted 2003, as well as increased insurance costs from unfavorable
development of prior year claims on our self-insured risk management program
totaling $0.6 million, and approximately $1.0 million of facility startup costs.
These decreases in gross profit were partially offset by margin from the overall
increase in revenue and approximately $2.0 million of income from a positive
settlement of a warranty obligation.

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Selling, general and administrative expenses were approximately $26.1
million, or 8.7 percent of revenues, for the year ended December 31, 2003,
compared to approximately $22.9 million, or 8.4 percent of revenues, for 2002,
an increase of approximately $3.2 million. Selling, general and administrative
expenses increased as a percent of revenues primarily due to recording bad debt
expense of $1.0 million in the fourth quarter of 2003.

In response to lower-than-expected operating results, management performed
a review of our overhead structure and reorganized certain administrative
functions in the fourth quarter of 2003. As a result of these decisions, we
recorded $1.2 million in reorganization costs in 2003 related to severance and
termination costs.

Amortization of intangibles increased from approximately $0.1 million in
2002 to approximately $0.4 million in 2003 resulting from the write off of $0.4
million of due diligence costs on potential acquisitions that were not
consummated.

As a result of the foregoing, income from operations for the year ended
December 31, 2003, decreased to approximately $36.4 million from approximately
$46.8 million in 2002, a decrease of approximately $10.4 million, or 22.2
percent.

Other expense for the year ended December 31, 2003, was approximately $0.1
million compared to approximately $5.5 million in 2002, a decrease of
approximately $5.4 million. The decrease relates primarily to the write off of
deferred debt costs of $7.2 million related to the refinancing of debt in 2002,
offset by a gain associated with an offset swap arrangement entered into in 2002
of approximately $1.7 million. There were no such swap activity in 2003.

Interest expense for the year ended December 31, 2003, remained flat at
approximately $23.4 million compared to approximately $23.5 million in 2002.

For the year ended December 31, 2003, we recorded a provision for income
taxes of approximately $5.2 million compared to $6.8 million in the prior year.
Our effective tax rate was 40.3 percent in 2003 compared to 38 percent in 2002.
The increase in the effective tax rate is primarily related to the increase in
income taxes at the state level. Our provision for income taxes differs from the
federal statutory rate primarily due to state income taxes. Our 2003 tax
provision is principally a deferred tax provision that will not significantly
impact cash flow since we have significant tax deductions in excess of book
deductions and net operating loss carryforwards available to offset taxable
income.

As a result of the foregoing, net income before cumulative effect of
change in accounting for derivatives and asset retirement obligations and
preferred stock dividends decreased to approximately $7.8 million for 2003
compared to approximately $11.1 million in 2002.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 (unaudited)

For the year ended December 31, 2002, revenue was approximately $272.6
million compared to approximately $260.2 million in 2001, an increase of
approximately $12.4 million, or 4.8 percent, with approximately $3.5 million
relating to the Earthwise acquisition and the balance from internal growth.

Gross profit for the year ended December 31, 2002, was approximately $70.7
million compared to approximately $68.3 million for the year ended 2001. Gross
profit, as a percentage of revenue, was 26.0 percent in 2002 compared to 26.2
percent in 2001.

Selling, general and administrative expenses were approximately $22.9
million, or 8.4 percent of revenues, for the year ended December 31, 2002,
compared to approximately $21.8 million, or 8.4 percent of revenues, for 2001,
an increase of approximately $1.1 million, but no change as a percentage of
revenues.

During 2002, we decided to reorganize by reducing the number of our
operating regions, which resulted in approximately $0.7 million of severance
costs in connection with the termination of 39 employees and approximately $0.2
million of terminated office lease arrangements. The total costs incurred of
approximately $0.9 million were reported as reorganization costs in 2002. There
were no such reorganization costs in the prior year.

Special credits, net, totaling approximately $5.0 million in 2001 included
an approximately $6.0 million gain from a litigation settlement related to
claims between Synagro and Azurix Corp. arising from financing and merger
discussions between the companies that were terminated in October 1999 and
settled in September 2001, an approximately $1.1 million gain resulting from the
settlement

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of other litigation, partially offset by a $2.2 million charge for our estimated
net exposure for unpaid insurance claims and other costs related to our 1998 and
1999 policy periods with our previous underwriter, Reliance National Indemnity
Company, which is in liquidation. There were no special charges or credits in
2002.

Amortization of intangibles decreased from approximately $4.5 million in
2001 to approximately $0.1 million in 2002 as a result of the adoption of SFAS
No. 142 in January 2002, which no longer allows the amortization of goodwill.

As a result of the foregoing, income from operations for the year ended
December 31, 2002, was approximately $46.8 million compared to approximately
$47.0 million for the same period in 2001, a decrease of approximately $0.2
million, or 0.4 percent.

Other expense for the year ended December 31, 2002, was approximately $5.5
million compared to other income of approximately $0.2 million in 2001. The
increase in expense relates primarily to the write off of deferred debt costs
related to the refinancing of debt, approximately $7.2 million, offset by a gain
associated with an offset swap arrangement entered into in 2002 of approximately
$1.7 million. There were no such items in 2001.

Interest expense for the year ended December 31, 2002, was approximately
$23.5 million compared to approximately $27.0 million for the same period in
2001. Interest expense as a percent of revenue decreased from 10.4 percent in
2001 to 8.6 percent in 2002. The decrease in interest expense is related to
reductions in debt funded from cash flow from operations and a decrease in our
weighted average interest rate.

For the year ended December 31, 2002, we recorded a provision for income
taxes of approximately $6.8 million compared to approximately $0.6 million in
the prior year. There were minimal tax requirements in 2001 as the valuation
allowance related to certain deferred taxes offset deferred tax provision
requirements. Our 2002 tax provision is principally a deferred provision that
will not significantly impact cash flow since we have significant tax deductions
in excess of book deductions and net operating loss carryforwards available to
offset taxable income.

As a result of the foregoing, net income before cumulative effect of
change in accounting for derivatives and preferred stock dividends of
approximately $11.1 million was reported for the year ended December 31, 2002,
compared to approximately $19.7 million in 2001.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

During the past three years, our principal sources of funds were cash
generated from our operating activities. We use cash mainly for capital
expenditures, working capital and debt service. In the future, we expect that we
will use cash principally to fund working capital, our debt service and
repayment obligations, and capital expenditures. In addition, we may use cash to
pay dividends on our preferred stock and potential earn out payments resulting
from prior acquisitions. We have historically financed our acquisitions
principally through the issuance of equity and debt securities, our credit
facility, and funds provided by operating activities.

HISTORICAL CASH FLOWS

Cash Flows from Operating Activities. For the year ended December 31,
2003, cash flows from operating activities decreased to approximately $24.1
million from approximately $29.7 million for the same period in 2002, a decrease
of approximately $5.6 million, or 18.9 percent. The decrease primarily relates
to the decrease in income from operations of $10.4 million partially offset by
cash flow generated from the decrease in prepaid expenses as a result of the
change in renewal dates for insurance.

Cash Flows from Investing Activities. For the year ended December 31,
2003, cash flows used for investing activities decreased to approximately $3.4
million from approximately $16.7 million for the same period in 2002, a decrease
of approximately $13.3 million. The decrease is primarily due to approximately
$14.2 million of proceeds from a sales-leaseback transaction in the second
quarter of 2003.

Cash Flows from Financing Activities. For the year ended December 31,
2003, cash flows used for financing activities increased to approximately $20.8
million from approximately $13.0 million for the same period in 2002, an
increase of approximately $7.8 million. Cash flows used for financing activities
in 2002 primarily relates to $20.8 million of payments on debt, while 2001
relates to payments on debt, net of proceeds from debt totaling $6.7 million and
$7.3 million of debt issuance costs.

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CAPITAL EXPENDITURE REQUIREMENTS

Capital expenditures for the year ended December 31, 2003, totaled
approximately $26.5 million, which included approximately $5.3 million to fund
construction of the Sacramento biosolids processing facility and $8.0 million of
capital leases, compared to approximately $21.8 million in 2002. Our ongoing
capital expenditure program consists of expenditures for replacement equipment,
betterments and growth. We expect our capital expenditures for 2004 to be
approximately $28 to $30 million, which should include approximately $13.0
million related to the construction of the Sacramento biosolids processing
facility.

DEBT SERVICE REQUIREMENTS

On March 9, 2004, we amended our credit facility to, among other things,
exclude certain charges from its financial covenant calculations, to clarify
certain defined terms, to increase the amount of indebtedness permitted under
its total leverage ratio, and to reset capital and operating lease limitations.

In May 2003, we incurred indebtedness of $0.5 million to the former owners
of Aspen in connection with the Aspen acquisition. If certain post-closing
conditions are met, as defined in the purchase agreement, the note payable to
the former owners is payable monthly at an annual interest rate of five percent.
We currently believe these post-closing conditions will be met.

In August 2002, we incurred indebtedness of approximately $1.5 million to
the former owners of Earthwise in connection with the Earthwise acquisition.
Terms of the note issued in connection with the acquisition require three equal,
annual installments beginning October 2003. Interest of five percent per annum
is payable quarterly beginning October 1, 2002. The first payment was made on
September 30, 2003.

In May 2002, we entered into a new $150 million senior credit facility
that provides for a $70 million funded term loan and up to a $50 million
revolver, with the ability to increase the total commitment to $150 million. The
term loan proceeds were used to pay off the existing senior debt that remained
unpaid after the private placement of our 9 1/2 percent Senior Subordinated
Notes due 2009. This new facility is collateralized by substantially all of our
assets and those of our subsidiaries (other than assets securing nonrecourse
debt) and includes covenants restricting the incurrence of additional
indebtedness, liens, certain payments and sale of assets. The new senior credit
agreement contains standard covenants, including compliance with laws,
limitations on capital expenditures, restrictions on dividend payments,
limitations on mergers and compliance with certain financial covenants. During
May 2003, we amended our credit facility to increase the revolving loan
commitment to approximately $95 million. Requirements for mandatory debt
payments from excess cash flows, as defined, are unchanged in the new credit
facility.

In April 2002, we completed the private placement of $150 million
aggregate principal amount of 9 1/2 percent Senior Subordinated Notes due 2009
and used the proceeds to pay down approximately $92 million of senior bank debt
and to pay off approximately $53 million of 12 percent subordinated debt. In
September 2002, we exchanged all of our outstanding, unregistered 9 1/2 percent
Senior Subordinated Notes due 2009 for registered 9 1/2 percent Senior
Subordinated Notes due 2009, with substantially identical terms. During 2002, we
recorded a $7.2 million noncash write off to other expense, which represents the
unamortized deferred debt costs related to the debt that was repaid with the net
proceeds received from the Notes and the new senior credit facility.

In 1996, the Maryland Energy Financing Administration (the
"Administration") issued nonrecourse tax-exempt project revenue bonds (the
"Maryland Project Revenue Bonds") in the aggregate amount of $58.6 million. The
Administration loaned the proceeds of the Maryland Project Revenue Bonds to
Wheelabrator Water Technologies Baltimore L.L.C., now our wholly owned
subsidiary and known as Synagro -- Baltimore, L.L.C., pursuant to a June 1996
loan agreement, and the terms of the loan mirror the terms of the Maryland
Project Revenue Bonds. The loan financed a portion of the costs of constructing
thermal facilities located in Baltimore County, Maryland, at the site of its
Back River Wastewater Treatment Plant, and in the City of Baltimore, Maryland,
at the site of its Patapsco Wastewater Treatment Plant. We assumed all
obligations associated with the Maryland Project Revenue Bonds in connection
with our acquisition of the Bio Gro Division of Waste Management, Inc. in 2000.
Maryland Project Revenue Bonds in the aggregate amount of approximately $14.6
million have already been paid; the remaining Maryland Project Revenue Bonds
bear interest at annual rates between 5.65 percent and 6.45 percent and mature
on dates between December 1, 2004, and December 1, 2016.

In December 2002, the California Pollution Control Financing Authority
(the "Authority") issued nonrecourse revenue bonds ("Sacramento Biosolids
Facility Project") in the aggregate amount of $21.3 million. The nonrecourse
revenue bonds consist of $20.1 million Series 2002-A and $1.2 million Series
2002-B (taxable) (collectively, the "Bonds"). The Authority loaned the proceeds
of the Bonds to Sacramento Project Finance, Inc., a wholly owned subsidiary of
ours, pursuant to a loan agreement dated December 1,

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2002. The loan will finance the acquisition, design, permitting, constructing
and equipping of a biosolids dewatering and heat drying/pelletizing facility for
the Sacramento Regional Sanitation District. The Bonds bear interest at annual
rates between 4.25 percent and 5.5 percent and mature on dates between December
1, 2006, and December 1, 2024.

At December 31, 2003, future minimum principal payments of long-term debt
and Nonrecourse Project Revenue Bonds (see Note 6) and Capital Lease Obligations
(see Note 7) are as follows (in thousands):

NONRECOURSE CAPITAL
LONG-TERM PROJECT LEASE
YEAR ENDED DECEMBER 31, DEBT REVENUE BONDS OBLIGATIONS TOTAL
----------------------------------- -------------- ---------------- -------------- ------------

2004 ............................... $ 955 $ 2,570 $ 2,678 $ 6,203
2005 ............................... 955 2,710 2,780 6,445
2006 ............................... 455 1,194 2,493 4,142
2007 ............................... 448 -- 3,211 3,659
2008 ............................... 42,981 1,332 3,823 48,136
2009-2013 .......................... 150,000 20,160 441 170,601
2014-2018 .......................... -- 26,209 -- 26,209
Thereafter ......................... -- 10,696 -- 10,696
-------------- ---------------- -------------- ------------
Total............................... $ 195,794 $ 64,871 $ 15,426 $ 276,091
============== ================ ============== ============

We lease certain facilities and equipment under noncancelable, long-term
operating lease agreements. Minimum annual rental commitments under these leases
are as follows (in thousands):

YEAR ENDING DECEMBER 31,
------------------------

2004 ............................... $ 8,208
2005 ............................... 6,216
2006 ............................... 4,289
2007 ............................... 3,691
2008 ............................... 3,521
Thereafter ......................... 16,439
-----------
$ 42,364
===========

In 2003, we entered into capital leases totaling approximately $8.0
million for operating and transportation equipment. Future minimum lease
payments, together with the present value at the minimum lease payments, are as
follows (in thousands):

YEAR ENDED DECEMBER 31,
-----------------------

2004 ................................................. $ 3,600
2005 ................................................. 3,520
2006 ................................................. 3,059
2007 ................................................. 3,610
2008 ................................................. 3,823
Thereafter ........................................... 450
-------
Total minimum lease payments .............................. 18,062
Amount representing interest .............................. (2,636)
-------
Present value of minimum lease payments .............. 15,426
Current maturities of capital lease obligations ...... (2,678)
-------
Long-term capital lease obligations .................. $12,748
=======

We believe we will have sufficient cash generated by our operations and
available through our existing credit facility to provide for future working
capital and capital expenditure requirements that should be adequate to meet our
liquidity needs for the foreseeable future, including payment of interest on our
credit facility and payments on the Nonrecourse Project Revenue Bonds. We cannot
assure you, however, that our business will generate sufficient cash flow from
operations, that any cost savings and any operating improvements will be
realized or that future borrowings will be available to us under our credit
facility in an amount sufficient to enable us to pay our indebtedness or to fund
our other liquidity needs. We may need to refinance all or a portion of our
indebtedness on or before maturity. We cannot assure you that we will be able to
refinance any of our indebtedness, including our credit facility, on
commercially reasonable terms or at all.

24

We have entered into various lease transactions to purchase transportation
and operating equipment that have been accounted for as capital lease
obligations and operating leases. The capital leases have lease terms of three
to six years with interest rates from 5.0 percent to 7.18 percent. The net book
value of the equipment related to these capital leases totaled approximately
$7.8 million as of December 31, 2003. The operating leases have terms of two to
eight years. Additionally, we have guaranteed a maximum lease risk amount to the
lessor of one of the operating leases. The fair value of this guaranty is
approximately $0.4 million as of December 31, 2003.

SERIES D REDEEMABLE PREFERRED STOCK

We have authorized 32,000 shares of Series D Preferred Stock, par value
$.002 per share. In 2000, we issued a total of 25,033.601 shares of the Series D
Preferred Stock to GTCR Fund VII, L.P. and its affiliates, which is convertible
by the holders into a number of shares of our common stock computed by dividing
(i) the sum of (a) the number of shares to be converted multiplied by the
liquidation value and (b) the amount of accrued and unpaid dividends by (ii) the
conversion price then in effect. The initial conversion price is $2.50 per share
provided that in order to prevent dilution, the conversion price may be
adjusted. The Series D Preferred Stock is senior to our common stock or any
other of our equity securities. The liquidation value of each share of Series D
Preferred Stock is $1,000 per share. Dividends on each share of Series D
Preferred Stock accrue daily at the rate of eight percent per annum on the
aggregate liquidation value and may be paid in cash or accrued, at our option.
Upon conversion of the Series D Preferred Stock by the holders, the holders may
elect to receive the accrued and unpaid dividends in shares of our common stock
at the conversion price. The Series D Preferred Stock is entitled to one vote
per share. Shares of Series D Preferred Stock are subject to mandatory
redemption by us on January 26, 2010, at a price per share equal to the
liquidation value plus accrued and unpaid dividends. If the outstanding shares
of Series D Preferred Stock excluding accrued dividends were converted at
December 31, 2003, they would represent 10,013,441 shares of common stock.

SERIES E REDEEMABLE PREFERRED STOCK

We have authorized 55,000 shares of Series E Preferred Stock, par value
$.002 per share. GTCR Fund VII, L.P. and its affiliates own 37,504.229 shares of
Series E Preferred Stock and certain affiliates of The TCW Group, Inc. own
7,254.462 shares. The Series E Preferred Stock is convertible by the holders
into a number of shares of our common stock computed by dividing (i) the sum of
(a) the number of shares to be converted multiplied by the liquidation value and
(b) the amount of accrued and unpaid dividends by (ii) the conversion price then
in effect. The initial conversion price is $2.50 per share provided that in
order to prevent dilution, the conversion price may be adjusted. The Series E
Preferred Stock is senior to our common stock and any other of our equity
securities. The liquidation value of each share of Series E Preferred Stock is
$1,000 per share. Dividends on each share of Series E Preferred Stock accrue
daily at the rate of eight percent per annum on the aggregate liquidation value
and may be paid in cash or accrued, at our option. Upon conversion of the Series
E Preferred Stock by the holders, the holders may elect to receive the accrued
and unpaid dividends in shares of our common stock at the conversion price. The
Series E Preferred Stock is entitled to one vote per share. Shares of Series E
Preferred Stock are subject to mandatory redemption by us on January 26, 2010,
at a price per share equal to the liquidation value plus accrued and unpaid
dividends. If the outstanding shares of Series E Preferred Stock excluding
accrued dividends were converted at December 31, 2003, they would represent
17,903,475 shares of common stock.

The future issuance of Series D and Series E Preferred Stock may result in
noncash beneficial conversions valued in future periods recognized as preferred
stock dividends if the market value of our common stock is higher than the
conversion price at date of issuance.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires all business combinations initiated
after June 30, 2001, to be accounted for using the purchase method. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. Separable intangible assets that are not deemed to have
indefinite lives will be amortized over their useful lives. We completed the
initial impairment test required by the provisions of SFAS No. 142 as of January
1, 2002, and determined that there was no impairment of our goodwill.

25

Effective January 1, 2002, we discontinued the amortization of goodwill in
accordance with our adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets." The following table provides pro forma disclosure of net income (loss)
and earnings (loss) per share for the year ended December 31, 2001, as if
goodwill had not been amortized and disclosure of actual results for the years
ended December 31, 2003 and 2002, for comparative purposes:

YEAR ENDED
DECEMBER 31,
------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
2003 2002 2001
------------ ------------- -------------
(unaudited)

Reported net income (loss) applicable to common stock ........ $ (931) $ 3,405 $ 10,555
Add back: Goodwill amortization, net of tax .................. -- -- 3,314
------------ ------------- -------------
Adjusted net income (loss) ................................... $ (931) $ 3,405 $ 13,869
============ ============= =============

Basic income (loss) per share:
Reported earnings (loss) per share ....................... $ (0.05) $ 0.17 $ 0.54
Adjusted earnings (loss) per share ....................... (0.05) 0.17 0.71

Diluted income (loss) per share:
Reported earnings (loss) per share ....................... $ (0.05) $ 0.17 $ 0.36
Adjusted earnings (loss) per share ....................... (0.05) 0.17 0.43

The changes in the carrying amount of goodwill for the years ended
December 31, 2003 and 2002, were as follows (in thousands):

Balance at January 1, 2002 .............. $ 163,739
Goodwill acquired during the year ....... 4,643
Adjustments ............................. 82
------------
Balance at January 1, 2003 .............. 168,464
Goodwill acquired during the year ....... 3,150
Adjustments ............................. 784
------------
Balance at December 31, 2003 ............ $ 172,398
============

The goodwill acquired during the year relates to our acquisition of Aspen
Resources, Inc. ("Aspen") (see Note 2), while goodwill adjustments primarily
represent payments of contingent consideration made on acquisitions prior to
2003.

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statement Nos. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections." Among other things, SFAS No. 145 requires that gains and
losses from extinguishment of debt be classified as extraordinary items only if
they meet the criteria in Accounting Principles Board ("APB") Opinion No. 30.
SFAS No. 145 is effective for us beginning January 1, 2003. As a result of this
statement, we reclassified our write-off of $7.2 million of deferred debt costs
that was originally recorded in 2002 as an extraordinary loss on early
extinguishment of debt totaling $4.5 million, net of taxes of $2.8 million, to
other expense and provision for income taxes, respectively, in the accompanying
consolidated statement of operations for 2002.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. We
adopted SFAS No. 146 during the first quarter of 2003 and there was no effect on
our results of operations and financial position.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. We adopted the disclosure requirements of FIN 45
for the year ended December 31, 2002. Additionally, on January 1, 2003, the
accounting requirements were adopted with no effect on our financial position or
results of operations.

During 1996, we adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123, which is effective for fiscal years beginning after
December 15, 1995, establishes financial accounting and reporting standards for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods and services from nonemployees.
SFAS No. 123 requires, among other things, that compensation cost be calculated
for fixed stock options at the grant

26

date by determining fair value using an option-pricing model. We have the option
of recognizing the compensation cost over the vesting period as an expense in
the income statement or making pro forma disclosures in the notes to the
financial statements for employee stock-based compensation.

We continue to apply APB Opinion No. 25 and related interpretations in
accounting for our plans. Accordingly, no compensation cost has been recognized
in the accompanying consolidated financial statements for our stock
option plans. Had we elected to apply SFAS No. 123, our net income and income
(loss) per diluted share would have approximated the pro forma amounts indicated
below:

YEAR ENDED DECEMBER 31,
(IN THOUSANDS EXCEPT PER SHARE DATA)
2003 2002 2001
--------- --------- -----------
(unaudited)

Net income (loss) applicable to common stock,
as reported ................................................. $ (931) $ 3,405 $ 10,555
Less: Compensation expense per SFAS No. 123,
net of tax .................................................. $ 2,390 $ 2,697 $ 4,122
Pro forma income (loss) after effect of SFAS No. 123 .......... $ (3,321) $ 708 $ 6,433
Diluted earnings (loss) per share, as reported ................ $ (0.05) $ 0.17 $ 0.36
Pro forma earnings (loss) per share after effect of
SFAS No. 123 ................................................ $ (0.17) $ 0.04 $ 0.13

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model resulting in a weighted average
fair value of $1.63, $1.35 and $1.49 for grants made during the years ended
December 31, 2003, 2002, and 2001, respectively. The following assumptions were
used for option grants made during 2003, 2002, and 2001, respectively: expected
volatility of 58 percent, 42 percent and 82 percent; risk-free interest rates of
3.98 percent, 5.20 percent and 4.97 percent; expected lives of up to ten years
and no expected dividends to be paid. The compensation expense included in the
above pro forma data may not be indicative of amounts to be included in future
periods as the fair value of options granted prior to 1995 was not determined
and we expect future grants.

On January 1, 2003, we adopted SFAS No. 143, "Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method. Our asset retirement obligations
primarily consist of equipment dismantling and foundation removal at certain
facilities and temporary storage facilities. During the first quarter of 2003,
we recorded a charge related to the cumulative effect of change in accounting
for asset retirement obligations, net of tax, totaling approximately $0.5
million (approximately $0.8 million before tax), increased liabilities to
approximately $1.6 million, and increased property, plant and equipment by
approximately $0.5 million. There was no impact on our cash flows as a result of
adopting SFAS No. 143. The pro forma asset retirement obligation would have been
approximately $1.4 million at January 1, 2001, and approximately $1.5 million
and $1.6 million at December 31, 2001 and 2002, respectively, had we adopted
SFAS No. 143 on January 1, 2001. The asset retirement obligation, which is
included on the consolidated balance sheet in other long-term liabilities
including accretion of approximately $0.1 million, was approximately $1.7
million at December 31, 2003.

The pro forma effect on net income before preferred stock dividends, net
income applicable to common stock and income per share had SFAS No. 143 been
adopted as of January 1, 2001, would have been as follows:

YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------- -----------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
----------- --------- ----------- ---------
(in thousands except per share data)
(unaudited)

Net income before preferred
stock dividend ........... $11,064 $ 10,882 $17,803 $ 17,374
Income applicable to
common stock ............. $ 3,405 $ 3,223 $10,555 $ 10,126
Income per share:
Basic ................... $ 0.17 $ 0.16 $ 0.54 $ 0.52
Diluted ................. $ 0.17 $ 0.16 $ 0.36 $ 0.35

In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN No. 46"). FIN No. 46 defines
a variable interest entity as an entity in which equity investors do not have
the characteristics of a controlling

27

financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN No. 46 requires an entity to consolidate a variable interest
entity if that entity will absorb a majority of the variable interest entity's
expected losses if they occur, receive a majority of the variable interest
entity's expected residual returns if they occur, or both. FIN No. 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of the pronouncement were initially to be
effective for the first interim or annual period beginning after June 15, 2003.
However, in October 2003, the FASB delayed the effective date of FIN No. 46 on
these entities to the first period beginning after December 15, 2003. We
determined that we do not have any variable interest entities at December 31,
2003, as defined by the pronouncement.

In May 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. This statement is effective for contracts
entered into or modified after September 30, 2003, (except for certain
exceptions) and for hedging relationships designated after September 30, 2003.
We adopted SFAS No. 149 in the fourth quarter of 2003 and there was no effect on
our results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 established standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003, and must be applied prospectively by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of the statement and still existing at the beginning of the
interim period of adoption.

While we do have mandatory redeemable preferred stock with characteristics
of both liabilities and equity, our Series D and Series E preferred stock is
also convertible to shares of our common stock at the option of the holder up
until the mandatory redemption date. Additionally, the option feature held by
the holder is considered to be substantive as the conversion price was less than
the market price at the date of issuance. Based on the above features of the
preferred stock, the adoption of SFAS No. 150 did not have a material effect on
our financial position or results of operations.

CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS

In preparing financial statements in conformity with accounting principles
generally accepted in the United States, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following are our significant estimates and assumptions made in preparation of
our financial statements:

Allowance for Doubtful Accounts -- We estimate losses for uncollectible
accounts based on the aging of the accounts receivable and the evaluation and
the likelihood of success in collecting the receivable. Allowance for doubtful
accounts at December 31, 2003 and 2002, was approximately $1.5 million and $1.3
million, respectively.

Loss Contracts -- We evaluate our revenue producing contracts to determine
whether the projected revenues of such contracts exceed the direct cost to
service such contracts. These evaluations include estimates of the future
revenues and expenses. Accruals for loss contracts are adjusted based on these
evaluations.

Property and Equipment/Long-Lived Assets -- Management adopted SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" during the
first quarter of 2002. Property and equipment is reviewed for impairment
pursuant to these provisions. The carrying amount of an asset (group) is
considered impaired if it exceeds the sum of our estimate of the undiscounted
future cash flows expected to result from the use and eventual disposition of
the asset (group), excluding interest charges.

We regularly incur costs to develop potential projects or facilities and
procure contracts for the design, permitting, construction and operations of
facilities. We recorded $14.7 million in property and long-term assets related
to these activities at December 31, 2003, compared to $8.8 million at December
31, 2002. We routinely review the status of each of these projects to determine
if these costs are realizable. If we are unsuccessful in obtaining the required
permits, government approvals, or fulfilling the contract requirements, these
costs will be expensed.

28

Goodwill -- Goodwill attributable to our reporting units is tested for
impairment by comparing the fair value of each reporting unit with its carrying
value. Significant estimates used in the determination of fair value include
estimates of future cash flows, future growth rates, costs of capital and
estimates of market multiples. As required under current accounting standards,
we test for impairment annually at year end unless factors become known that
impairment may have occurred prior to year end.

Purchase Accounting -- We estimate the fair value of assets, including
property, machinery and equipment and its related useful lives and salvage
values, and liabilities when allocating the purchase price of an acquisition to
the acquired assets and liabilities.

Income Taxes -- We assume the deductibility of certain costs in our income
tax filings and estimate the recovery of deferred income tax assets. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which the activity underlying these
assets become deductible. We consider the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. If actual future taxable income differs from our
estimates, we may not realize deferred tax assets to the extent we have
estimated.

Legal and Contingency Accruals -- We estimate and accrue the amount of
probable exposure we may have with respect to litigation, claims and
assessments. These estimates are based on management's assessment of the facts
and the probabilities of the ultimate resolution of the litigation.

Self-Insurance Reserves -- We are substantially self-insured for workers'
compensation, employers' liability, auto liability, general liability and
employee group health claims in view of the relatively high per-incident
deductibles we absorb under our insurance arrangements for these risks. Losses
up to deductible amounts are estimated and accrued based upon known facts,
historical trends, industry averages and actuarial assumptions regarding future
claims development and claims incurred but not reported.

Actual results could differ materially from the estimates and assumptions
that we use in the preparation of our financial statements.

OTHER

We maintain two leases with an affiliate of one of our stockholders. The
first lease has an initial term through July 31, 2004, with an option to renew
for an additional five-year period. Rental payments made under this lease in
2003 totaled approximately $0.1 million. The second lease has an initial term
through December 31, 2013. Rental payments made under the second lease in 2003
totaled approximately $0.1 million.

As of December 31, 2003, we had generated net operating loss ("NOL")
carryforwards of approximately $90 million available to reduce future income
taxes. These carryforwards begin to expire in 2008. A change in ownership, as
defined by federal income tax regulations, could significantly limit our ability
to utilize our carryforwards. Accordingly, our ability to utilize our NOLs to
reduce future taxable income and tax liabilities may be limited. Additionally,
because federal tax laws limit the time during which these carryforwards may be
applied against future taxes, we may not be able to take full advantage of these
attributes for federal income tax purposes. We estimate that our effective tax
rate in 2004 will approximate 39 percent of pre-tax income. Substantially all of
our tax provision over the next several years is expected to be deferred in
nature due to significant tax deductions in excess of book deductions for
goodwill and depreciation.

RISK FACTORS WHICH MAY AFFECT FUTURE RESULTS

THE FACT THAT OUR 2001 FINANCIAL STATEMENTS INCLUDED HEREIN ARE UNAUDITED
COULD HAVE MATERIAL EFFECTS ON OUR COMPANY AND OUR SHAREHOLDERS; A RE-AUDIT OF
THOSE FINANCIAL STATEMENTS COULD IDENTIFY ITEMS REQUIRING RESTATEMENT.

Since we are unable to file three years of audited financial information
in our 2003 Annual Report on Form 10-K as required under Rules 3-01 and 3-02 of
Regulation S-X, our reports filed under the Securities Exchange Act of 1934 (the
"Exchange Act") will not be in full compliance with the requirements of the
Exchange Act. As a result, the effectiveness of our Registration Statement on
Form S-8 will be suspended, and we will be unable to issue shares under our
stock option plans and agreements. During any period when we are not current in
our SEC reports, neither our affiliates nor any person that purchased shares
from us in a private offering during the preceding two years will be able to
sell their shares in public markets pursuant to Rule 144 under the Securities
Act of 1933.

FEDERAL WASTEWATER TREATMENT AND BIOSOLID REGULATIONS MAY RESTRICT OUR
OPERATIONS OR INCREASE OUR COSTS OF OPERATIONS.

Federal wastewater treatment and wastewater residuals laws and regulations
impose substantial costs on us and affect our business in many ways. If we are
not able to comply with the governmental regulations and requirements that apply
to our operations, we could be subject to fines and penalties, and we may be
required to spend large amounts to bring operations into compliance or to
temporarily or permanently stop operations that are not permitted under the law.
Those costs or actions could have a material adverse effect on our business,
financial condition and results of operations.

Federal environmental authorities regulate the activities of the municipal
and industrial wastewater generators and enforce standards for the discharge
from wastewater treatment plants (effluent wastewater) with permits issued under
the authority of the

29

Clean Water Act, as amended. The treatment of wastewater produces an effluent
and wastewater solids. The treatment of these solids produces biosolids. The
Part 503 Regulations regulate the use and disposal of biosolids and wastewater
residuals and establish use and disposal standards for biosolids and wastewater
residuals that are applicable to publicly and privately owned wastewater
treatment plants in the United States. Biosolids may be surface disposed in
landfills, incinerated, or applied to land for beneficial use in accordance with
the requirements established by the regulations. To the extent demand for our
wastewater residuals treatment methods is created by the need to comply with the
environmental laws and regulations, any modification of the standards created by
such laws and regulations, or in their enforcement, may reduce the demand for
our wastewater residuals treatment methods. Changes in these laws or regulations
and/or changes in the enforcement of these laws or regulations may also
adversely affect our operations by imposing additional regulatory compliance
costs on us, and requiring the modification of and/or adversely affecting the
market for our wastewater residuals management services.

WE ARE SUBJECT TO EXTENSIVE AND INCREASINGLY STRICT FEDERAL, STATE AND LOCAL
ENVIRONMENTAL REGULATION AND PERMITTING.

Our operations are subject to increasingly strict environmental laws and
regulations, including laws and regulations governing the emission, discharge,
disposal and transportation of certain substances and related odor. Wastewater
treatment plants and other plants at which our biosolids management services may
be implemented are usually required to have permits, registrations and/or
approvals from state and/or local governments for the operation of such
facilities. Some of our facilities require air, wastewater, storm water,
composting, use or siting permits, registrations or approvals. We may not be
able to maintain or renew our current permits, registrations or licensing
agreements or to obtain new permits, registrations or licensing agreements,
including for the land application of biosolids when necessary. The process of
obtaining a required permit, registration or license agreement can be lengthy
and expensive. We may not be able to meet applicable regulatory or permit
requirements, and therefore may be subject to related legal or judicial
proceedings.

Many states, municipalities and counties have regulations, guidelines or
ordinances covering the land application of biosolids, many of which set either
a maximum allowable concentration or maximum pollutant-loading rate for at least
one pollutant. The Part 503 Regulations also require certain monitoring to
ensure that certain pollutants or pathogens are below thresholds. The EPA has
considered increasing these thresholds or adding new thresholds for different
substances, which could increase our compliance costs. In addition, some states
have established management practices for land application of biosolids. Some
members of Congress, some state or local authorities, and some private parties,
have sought to prohibit or limit the land application, agricultural use, thermal
processing or composting of biosolids. In states where we currently conduct
business, certain counties and municipalities have banned the land application
of Class B biosolids. Other states and local authorities are reviewing their
current regulations relative to land application of biosolids. There can be no
assurances that prohibition or limitation efforts will not be successful and
have a material adverse effect on our business, financial condition and results
of operations. In addition, many states enforce landfill restrictions for
nonhazardous biosolids and some states have site restrictions or other
management practices governing lands. These regulations typically require a
permit to use biosolid products (including incineration ash) as landfill daily
cover material or for disposal in the landfill. It is possible that landfill
operators will not be able to obtain or maintain such required permits.

Any of the permits, registrations or approvals noted above, or related
applications may be subject to denial, revocation or modification, or challenge
by a third party, under various circumstances. In addition, if new environmental
legislation or regulations are enacted or existing legislation or regulations
are amended or are enforced differently, we may be required to obtain
additional, or modify existing, operating permits, registrations or approvals.

Maintaining, modifying or renewing our current permits, registrations or
licensing agreements or obtaining new permits, registrations or licensing
agreements after new environmental legislation or regulations are enacted or
existing legislation or regulations are amended or enforced differently may be
subject to public opposition or challenge. Much of this public opposition and
challenge, as well as related complaints, relates to odor issues, even when we
are in compliance with odor requirements and even though we have worked hard to
minimize odor from our operations. Public misperceptions about our business and
any related odor could influence the governmental process for issuing such
permits, registrations and licensing agreements or for responding to any such
public opposition or challenge. Community groups could pressure local
municipalities or state governments to implement laws and regulations which
could increase our costs of our operations.

WE ARE AFFECTED BY UNUSUALLY ADVERSE WEATHER AND WINTER CONDITIONS.

Our business is adversely affected by unusual weather conditions and
unseasonably heavy rainfall, which can temporarily reduce the availability of
land application sites in close proximity to our business upon which biosolids
can be beneficially reused and applied to crop land. Material must be
transported to either a permitted storage facility (if available) or to a local
landfill for disposal. In either

30

case, this results in additional costs for disposal of the biosolids material.
In addition, our revenues and operational results are adversely affected during
the winter months when the ground freezes thus limiting the level of land
application that can be performed. Long periods of inclement weather could
reduce our revenues and operational results causing a material adverse effect on
our results of operations and financial position.

OUR ABILITY TO GROW MAY BE LIMITED BY DIRECT OR INDIRECT COMPETITION WITH OTHER
BUSINESSES THAT PROVIDE SOME OR ALL OF THE SAME SERVICES THAT WE PROVIDE.

We provide a variety of services relating to the transportation and
treatment of wastewater residuals. We are in direct and indirect competition
with other businesses that provide some or all of the same services including
small local companies, regional residuals management companies, and national and
international water and wastewater operations/privatization companies,
technology suppliers, municipal solid waste companies, farming operations and,
most significantly, municipalities and industries who choose not to outsource
their residuals management needs. Some of these competitors are larger, more
firmly established and have greater capital resources than we have.

We derive a substantial portion of our revenue from services provided
under municipal contracts. Many of these will be subject to competitive bidding
at some time in the future. We also intend to bid on additional municipal
contracts. However, we may not be the successful bidder. In addition, some of
our contracts will expire in the near future and those contracts may be renewed
on less attractive terms. If we are not able to replace revenues from contracts
lost through competitive bidding or from the renegotiation of existing contracts
with other revenues within a reasonable time period, the lost revenue could have
a material and adverse effect on our business, financial condition and results
of operations.

OUR CUSTOMER CONTRACTS MAY BE TERMINATED PRIOR TO THE EXPIRATION OF THEIR TERM.

A substantial portion of our revenue is derived from services provided
under contracts and written agreements with our customers. Some of these
contracts, especially those contracts with large municipalities (including our
largest contract and at least four of our other top ten customers), provide for
termination of the contract by the customer after giving relative short notice
(in some cases as little as ten days). In addition, some of these contracts
contain liquidated damages clauses, which may or may not be enforceable in the
event of early termination of the contracts. If one or more of these contracts
are terminated prior to the expiration of its term, and we are not able to
replace revenues from the terminated contract or receive liquidated damages
pursuant to the terms of the contract, the lost revenue could have a material
and adverse effect on our business, financial condition and results of
operation.

A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A LIMITED NUMBER OF CUSTOMERS
AND OUR REVENUE AND PROFITS COULD DECREASE SIGNIFICANTLY IF WE LOST ONE OR MORE
OF THEM AS CUSTOMERS.

Our business depends on our ability to provide services to our customers.
One or more of these customers may stop buying services from us or may
substantially reduce the amount of services we provide them. Any cancellation,
deferral or significant reduction in the services we provide these principal
customers or a significant number of smaller customers could seriously harm our
business, financial condition and results of operations. For the year ended
December 31, 2003, our single largest customer accounted for 17 percent of our
revenues and our top ten customers accounted for approximately 37 percent of our
revenues.

WE MAY NOT BE ABLE TO OBTAIN BONDING REQUIRED IN CONNECTION WITH CERTAIN
CONTRACTS ON WHICH WE BID.

Consistent with industry practice, we are required to post performance
bonds in connection with certain contracts on which we bid. In addition, we are
often required to post both performance and payment bonds at the time of
execution of contracts for commercial, federal, state and municipal projects.
The amount of bonding capacity offered by sureties is a function of the
financial health of the entity requesting the bonding. Although we could issue
letters of credit under our credit facility for bonding purposes, if we are
unable to obtain bonding in sufficient amounts we may be ineligible to bid or
negotiate on projects. As of March 26, 2004, we had a bonding capacity of
approximately $172 million with approximately $117 million utilized as of that
date.

WE ALWAYS FACE THE RISK OF LIABILITY AND INSUFFICIENT INSURANCE.

We carry $51 million of liability insurance (including umbrella coverage),
and under a separate policy, $10 million of aggregate pollution and legal
liability insurance ($10 million each loss) subject to retroactive dates, which
we consider sufficient to meet regulatory and customer requirements and to
protect our employees, assets and operations. It is possible that we will not be
able to

31

maintain such insurance coverage in the future. Further, we could face personal
injury, third-party or environmental claims or other damages resulting in
substantial liability for which we are uninsured and which could have a material
adverse effect on our business, financial condition and results of operations.

Our insurance programs utilize large deductible/self-insured retention
plans offered by a commercial insurance company. Large deductible/self-insured
retention plans allow us the benefits of cost-effective risk financing while
protecting us from catastrophic risk with specific stop-loss insurance limiting
the amount of self-funded exposure for any one loss.

WE ARE DEPENDENT ON THE AVAILABILITY AND SATISFACTORY PERFORMANCE OF
SUBCONTRACTORS FOR OUR DESIGN AND BUILD OPERATIONS.

We participate in design and build construction operations usually as a
general contractor. Virtually all design and construction work is performed by
unaffiliated third-party subcontractors. As a consequence, we are dependent upon
the continued availability of and satisfactory performance by these
subcontractors for the design and construction of our facilities. The
insufficient availability of and unsatisfactory performance by these
unaffiliated third-party subcontractors could have a material adverse effect on
our business, financial condition and results of operations. Further, as the
general contractor, we are legally responsible for the performance of our
contracts and if such contracts are underperformed or nonperformed by our
subcontractors, we could be financially responsible. Although our contracts with
our subcontractors provide for indemnification if our subcontractors do not
satisfactorily perform their contract, such indemnification may not cover our
financial losses in attempting to fulfill the contractual obligations.

FLUCTUATIONS IN FUEL COSTS COULD INCREASE OUR OPERATING EXPENSES AND NEGATIVELY
IMPACT OUR NET INCOME.

The price and supply of fuel is unpredictable and fluctuates based on
events outside our control, including geopolitical developments, supply and
demand for oil and gas, actions by OPEC and other oil and gas producers, war and
unrest in oil producing countries, regional production patterns and
environmental concerns. Because fuel is needed to run the fleet of trucks that
service our customers, our incinerators, our dryers and other facilities, price
escalations or reductions in the supply of fuel could increase our operating
expenses and have a negative impact on net income. In the past, we have
implemented a fuel surcharge to offset increased fuel costs. However, we are not
always able to pass through all or part of the increased fuel costs due to the
terms of certain customers' contracts and the inability to negotiate such pass
through costs in a timely manner.

WE ARE NOT ABLE TO GUARANTEE THAT OUR ESTIMATED REMAINING CONTRACT VALUE, WHICH
WE CALL BACKLOG, WILL RESULT IN ACTUAL REVENUES IN ANY PARTICULAR FISCAL PERIOD.

Any of the contracts included in our backlog, or estimated remaining
contract value, presented herein may not result in actual revenues in any
particular period or the actual revenues from such contracts may not equal our
backlog. In determining backlog, we calculate the expected payments remaining
under the current terms of our contracts, assuming the renewal of contracts in
accordance with their renewal provisions, no increase in the level of services
during the remaining term, and estimated adjustments for changes in the consumer
price index for contracts that contain price indexing. However, it is possible
that not all of our backlog will be recognized as revenue or earnings.

IF WE LOSE THE PENDING LAWSUITS WE ARE CURRENTLY INVOLVED IN, WE COULD BE LIABLE
FOR SIGNIFICANT DAMAGES AND LEGAL EXPENSES.

In the ordinary course of business, we may become involved in various
legal and administrative proceedings, including some related to our permits, to
land use or to environmental laws and regulations. We are currently subject to
several lawsuits relating to our business. Our defense to these claims or any
other claims against us may not be successful. If we lose these or future
lawsuits, we may have to pay significant damages and legal expenses, and we
could be subject to injunctions, court orders, loss of revenues and defaults
under our credit and other agreements.

In addition, we may be subject to future lawsuits or legal proceedings.
These claims, even if they are without merit, could be expensive and time
consuming to defend and if we were to lose any future cases we could be subject
to injunctions and damages that could have a material adverse effect on our
business, financial position and results of operations.

32

WE COULD FACE CONSIDERABLE BUSINESS AND FINANCIAL RISK IN IMPLEMENTING OUR
ACQUISITION STRATEGY.

As part of our growth strategy, we intend to consider acquiring
complementary businesses. We regularly engage in discussions with respect to
possible acquisitions. Future acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities, which could have a material adverse effect upon our business,
financial position and results of operations. Risks we could face with respect
to acquisitions include:

- difficulties in the integration of the operations, technologies,
products and personnel of the acquired company;

- potential loss of employees;

- diversion of management's attention away from other business
concerns;

- expenses of any undisclosed or potential legal liabilities of the
acquired company; and

- risks of entering markets in which we have no or limited prior
experience.

In addition, it is possible that we will not be successful in consummating
future acquisitions on favorable terms or at all.

WE ARE DEPENDENT ON OUR SENIOR MANAGEMENT FOR THEIR DEPTH OF INDUSTRY EXPERIENCE
AND KNOWLEDGE.

We are highly dependent on the services of our senior management team. Our
senior management team has been in the industry for many years and has
substantial industry knowledge and contacts. If a member of our senior
management team were to terminate his association with us, we could lose
valuable human capital, adversely affecting our business. We currently do not
maintain key man insurance on any member of our senior management team.

We generally enter into employment agreements with members of our senior
management team, which contain noncompete and other provisions. The laws of each
state differ concerning the enforceability of noncompetition agreements. State
courts will examine all of the facts and circumstances at the time a party seeks
to enforce a noncompete covenant. We cannot predict with certainty whether or
not a court will enforce a noncompete covenant in any given situation based on
the facts and circumstances at that time. If one of our key executive officers
were to leave us and the courts refused to enforce the noncompete covenant, we
might be subject to increased competition, which could have a material and
adverse effect on our business, financial condition and results of operations.

EFFORTS BY LABOR UNIONS TO ORGANIZE OUR EMPLOYEES COULD DIVERT MANAGEMENT
ATTENTION AND INCREASE OUR OPERATING EXPENSES.

In the past, labor unions have made attempts to organize our employees,
and these efforts may continue in the future. Certain groups of our employees
have chosen to be represented by unions, and we have negotiated collective
bargaining agreements with some of the groups. We cannot predict which, if any,
groups of employees may seek union representation in the future or the outcome
of collective bargaining. The negotiation of these agreements could divert
management attention and result in increased operating expenses and lower net
income. If we are unable to negotiate acceptable collective bargaining
agreements, we might have to wait through "cooling off" periods, which are often
followed by union-initiated work stoppages, including strikes. Depending on the
type and duration of such work stoppage, our operating expenses could increase
significantly.

WE MAY BECOME SUBJECT TO CERCLA.

CERCLA generally imposes strict joint and several liability for cleanup
costs upon: (1) present owners and operators of facilities at which hazardous
substances were disposed; (2) past owners and operators at the time of disposal;
(3) generators of hazardous substances that were disposed at such facilities;
and (4) parties who arranged for the disposal of hazardous substances at such
facilities. The costs of a CERCLA cleanup can be very expensive. Given the
difficulty of obtaining insurance for environmental impairment liability, such
liability could have a material impact on our business and financial condition.

CERCLA Section 107 liability extends to cleanup costs necessitated by a
release or threat of release of a hazardous substance. The definition of
"release" under CERCLA excludes the "normal application of fertilizer." The EPA
regards the land application of

33

biosolids that meet the Part 503 Regulations as a "normal application of
fertilizer," and thus not subject to CERCLA. However, if we were to transport or
handle biosolids that contain hazardous substances in violation of the Part 503
Regulations, we could be liable under CERCLA.

From time to time, we generate hazardous substances which we dispose at
landfills or we transport soils or other materials which may contain hazardous
substances to landfills. We also send residuals and ash from our incinerators to
landfills for use as daily cover over the landfill. Liability under CERCLA, or
comparable state statutes, can be founded on the disposal, or arrangement for
disposal, of hazardous substances at sites such as landfills and for the
transporting of such substances to landfills. Under CERCLA, or comparable state
statutes, we may be liable for the remediation of a disposal site that was never
owned or operated by us if the site contains hazardous substances that we
generated or transported to such site. We could also be responsible for
hazardous substances during actual transportation and may be liable for
environmental response measures arising out of disposal at a third party site
with whom we had contracted.

In addition, under CERCLA, or comparable state statutes, we could be
required to clean any of our current or former properties if hazardous
substances are released or are otherwise found to be present. We are currently
monitoring the remediation of soil and groundwater at one of our properties in
cooperation with the applicable state regulatory authority, but do not believe
any additional material expenditures will be required. However, there can be no
assurance that currently unknown contamination would not be found on this or
other properties.

OUR INTELLECTUAL PROPERTY MAY BE MISAPPROPRIATED OR SUBJECT TO CLAIMS OF
INFRINGEMENT.

We attempt to protect our intellectual property rights through a
combination of patent, trademark, and trade secret laws, as well as licensing
agreements. Our failure to obtain or maintain adequate protection of our
intellectual property rights for any reason could have a material adverse effect
on our business, results of operations and financial condition.

Our competitors, many of whom have substantially greater resources and
have made substantial investments in competing technologies, may have applied
for or obtained, or may in the future apply for and obtain, patents that will
prevent, limit or otherwise interfere with our ability to offer our services. We
have not conducted an independent review of patents issued to third parties.

We also rely on unpatented proprietary technology. It is possible that
others will independently develop the same or similar technology or otherwise
obtain access to our unpatented technology. To protect our trade secrets and
other proprietary information, we require employees, consultants, advisors and
collaborators to enter into confidentiality agreements. We cannot be assured
that these agreements will provide meaningful protection for our trade secrets,
know-how or other proprietary information in the event of any unauthorized use,
misappropriation or disclosure of such trade secrets, know-how or other
proprietary information. If we are unable to maintain the proprietary nature of
our technologies, we could be materially adversely affected.

IF WE DETERMINE THAT OUR GOODWILL IS IMPAIRED, WE MAY HAVE TO WRITE OFF ALL OR
PART OF IT.

Goodwill represents the aggregate purchase price paid by us in
acquisitions accounted for as a purchase over the fair value of the net assets
acquired. Under Statement of Financial Accounting Standards No. 142, we no
longer amortize goodwill, but review annually for impairment. In the event that
facts and circumstances indicate that goodwill may be impaired, an evaluation of
recoverability would be performed. If a write-down to market value of all or
part of our goodwill becomes necessary, our accounting results and net worth
would be adversely affected. As of December 31, 2003, our total goodwill, net of
amortization, was approximately $172.4 million.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We utilize financial instruments, which inherently have some degree of
market risk due to interest rate fluctuations. Management is actively involved
in monitoring exposure to market risk and continues to develop and utilize
appropriate risk management techniques. We are not exposed to any other
significant market risks, including commodity price risk, foreign currency
exchange risk or interest rate risks from the use of derivative financial
instruments. Management does not currently use derivative financial instruments
for trading or to speculate on changes in interest rates or commodity prices.

34

DERIVATIVES AND HEDGING ACTIVITIES

On July 24, 2003, we entered into two interest rate swap transactions with
two financial institutions to hedge our exposure to changes in the fair value on
$85 million of our $150 million 9 1/2 percent Senior Subordinated Notes due 2009
(the "Notes"). The purpose of these transactions was to convert future interest
due on $85 million of the Notes to a lower variable rate in an attempt to
realize savings on our future interest payments. The terms of the interest rate
swap contract and the underlying debt instruments are identical. We designated
these swap agreements as fair value hedges. The swaps have notional amounts of
$50 million and $35 million and mature in April 2009 to mirror the maturity of
the Notes. Under the agreements, we pay on a semi-annual basis (each April 1 and
October 1) a floating rate based on a six-month U.S. dollar LIBOR rate, plus a
spread, and receives a fixed-rate interest of 9 1/2 percent. During 2003, we
recorded interest savings related to these interest rate swaps of $1 million,
which served to reduce interest expense. The $0.8 million fair value of these
derivative instruments is included in other long-term liabilities as of December
31, 2003. The carrying value of our Notes was decreased by the same amount.

On June 25, 2001, we entered into a reverse swap on our 12 percent
subordinated debt and used the proceeds from the reverse swap agreement to
retire previously outstanding floating-to-fixed interest rate swap agreements
(the "Retired Swaps") and option agreements. Accordingly, the balance included
in accumulated other comprehensive loss included in stockholders' equity related
to the Retired Swaps is being recognized in future periods' income over the
remaining term of the original swap agreement. The amount of accumulated other
comprehensive income recognized for the year ended December 2003 was
approximately $0.5 million.

The 12 percent subordinated debt was repaid on April 17, 2002, with the
proceeds from the sale of the Notes. Accordingly, we discontinued using hedge
accounting for the reverse swap agreement on April 17, 2002. From April 17,
2002, through June 25, 2002, the fair value of this fixed-to-floating reverse
swap decreased by $1.7 million. This $1.7 million mark-to-market gain was
included in other income in the second quarter of 2002 financial statements. On
June 25, 2002, we entered into a floating-to-fixed interest rate swap agreement
that substantially offsets market value changes in our reverse swap agreement.
The liability related to this reverse swap agreement and the floating-to-fixed
offset agreement totaling approximately $2.8 million is reflected in other
long-term liabilities at December 31, 2003. The loss recognized during the year
ended December 31, 2003, related to the floating-to-fixed interest rate swap
agreement was approximately $0.2 million, while the gain recognized related to
the reverse swap agreement was approximately $0.1 million. The amount of the
ineffectiveness of the reverse swap agreement charged to other expense was
approximately $0.1 million for the year ended December 31, 2003.

INTEREST RATE RISK

Total debt at December 31, 2003, included approximately $44.3 million in
floating rate debt attributed to the Senior Credit Agreement at a base interest
rate plus 3.0 percent, or approximately 4.7 percent at December 31, 2003. We
also have interest rate swaps outstanding on our fixed rate debt. As a result,
our interest costs in 2004 will fluctuate based on short-term interest rates.
The impact on annual cash flow of a ten percent change in the floating rate
(i.e. LIBOR) would be approximately $0.2 million.

35

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

PAGE
----
Report of Independent Auditors - PricewaterhouseCoopers LLP ............. 37
Consolidated Balance Sheets as of December 31, 2003 and 2002 (restated).. 38
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001 (unaudited).......................... 39
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2003, 2002 and 2001 (restated and unaudited)............. 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 (unaudited).......................... 41
Notes to Consolidated Financial Statements .............................. 43

36

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of Synagro Technologies, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Synagro Technologies, Inc. and its subsidiaries (the "Company") at December 31,
2003 and 2002, and the results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" and effective January 1, 2003,
the Company adopted Statement of Financial Accounting Standards No. 143, "Asset
Retirement Obligations."

As discussed in Note 1, the Company restated its previously issued consolidated
financial statements for the year ended December 31, 2002.

PricewaterhouseCoopers LLP

Houston, Texas
March 29, 2004

37

SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)

DECEMBER 31,
-------------------------
2003 2002
--------- ---------
(RESTATED)
(SEE NOTE 1)

ASSETS
Current Assets:
Cash and cash equivalents ........................................ $ 206 $ 239
Restricted cash .................................................. 1,410 1,696
Accounts receivable, net ......................................... 59,581 54,814
Note receivable, current ......................................... 342 554
Prepaid expenses and other current assets ........................ 10,840 15,399
--------- ---------
Total current assets ..................................... 72,379 72,702

Property, machinery & equipment, net ............................... 213,697 213,331

Other Assets:
Goodwill ......................................................... 172,398 168,464
Restricted cash - construction fund .............................. 12,184 17,733
Restricted cash - debt service fund .............................. 7,275 7,491
Other, net ....................................................... 14,091 13,746
--------- ---------
Total assets ............................................. $ 492,024 $ 493,467
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ............................. $ 955 $ 1,111
Current maturities of nonrecourse project revenue bonds .......... 2,570 2,430
Current maturities of capital lease obligations .................. 2,678 1,280
Accounts payable and accrued expenses ............................ 47,479 48,812
--------- ---------
Total current liabilities ................................ 53,682 53,633

Long-Term Debt:
Long-term debt obligations, net .................................. 194,084 210,751
Nonrecourse project revenue bonds, net ........................... 62,301 64,841
Capital lease obligations, net ................................... 12,748 7,938
--------- ---------
Total long-term debt .......................................... 269,133 283,530
Other long-term liabilities ................................... 17,536 12,413
--------- ---------
Total liabilities ........................................ 340,351 349,576

Commitments and Contingencies

Redeemable Preferred Stock, 69,792.29 shares issued and
outstanding, redeemable at $1,000 per share ...................... 86,299 78,090
Stockholders' Equity:
Preferred stock, $.002 par value, 10,000,000 shares
authorized, none issued or outstanding ........................ -- --
Common stock, $.002 par value, 100,000,000 shares
authorized, 19,775,821 and 19,775,821 shares issued
and outstanding, respectively ................................. 40 40
Additional paid in capital ....................................... 82,113 90,322
Accumulated deficit .............................................. (15,477) (22,755)
Accumulated other comprehensive loss ............................. (1,302) (1,806)
--------- ---------
Total stockholders' equity ............................... 65,374 65,801
--------- ---------
Total liabilities and stockholders' equity ......................... $ 492,024 $ 493,467
========= =========

The accompanying notes are an integral part of these consolidated financial
statements.

38

SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)

YEAR ENDED DECEMBER 31,
----------------------------------------------------
2003 2002 2001
------------ ----------- ------------
(UNAUDITED)

Revenue ............................................................... $ 298,552 $ 272,628 $ 260,196
Cost of services ...................................................... 234,451 201,880 191,921
------------ ----------- ------------
Gross profit .......................................................... 64,101 70,748 68,275

Selling, general and administrative expenses .......................... 26,070 22,935 21,784
Reorganization costs .................................................. 1,169 905 --
Special credits, net .................................................. -- -- (4,982)
Amortization of intangibles ........................................... 450 108 4,489
------------ ----------- ------------
Income from operations .............................................. 36,412 46,800 46,984
------------ ----------- ------------
Other (income) expense:
Other (income), net ................................................. 77 5,454 (221)
Interest expense, net ............................................... 23,356 23,498 26,968
------------ ----------- ------------
Total other expense, net ......................................... 23,433 28,952 26,747
------------ ----------- ------------
Income before provision for income taxes .............................. 12,979 17,848 20,237
Provision for income taxes .......................................... 5,225 6,784 573
------------ ----------- ------------
Net income before cumulative effect of change in accounting
for derivatives and asset retirement obligations and preferred
stock dividends ..................................................... 7,754 11,064 19,664
Cumulative effect of change in accounting for derivatives ............ -- -- 1,861
Cumulative effect of change in accounting for asset retirement
obligations, net of tax benefit of $292 ............................ 476 -- --
------------ ----------- ------------
Net income before preferred stock dividends ........................... 7,278 11,064 17,803
Preferred stock dividends ............................................. 8,209 7,659 7,248
------------ ----------- ------------
Net income (loss) applicable to common stock .......................... $ (931) $ 3,405 $ 10,555
============ =========== ============

Earnings (loss) per share:

Basic -
Earnings (loss) per share before cumulative effect of change in
accounting for derivatives and asset retirement obligations ....... $ (0.03) $ 0.17 $ 0.64
Cumulative effect of change in accounting for derivatives ........... -- -- (0.10)
Cumulative effect of change in accounting for asset retirement
obligations ....................................................... (0.02) -- --
------------ ----------- ------------
Earnings (loss) per share ........................................... $ (0.05) $ 0.17 $ 0.54
============ =========== ============

Diluted -
Earnings (loss) per share before preferred stock dividends,
cumulative effect of change in accounting for derivatives
and asset retirement obligations .................................. $ (0.03) $ 0.17 $ 0.40
Cumulative effect of change in accounting for derivatives ........... -- -- (0.04)
Cumulative effect of change in accounting for asset retirement
obligations ....................................................... (0.02) -- --
------------ ----------- ------------
Net earnings (loss) per share ....................................... $ (0.05) $ 0.17 $ 0.36
============ =========== ============

Weighted average shares:

Weighted average shares outstanding for basic earnings
per share calculation ........................................... 19,775,821 19,627,132 19,457,389
Effect of dilutive stock options
-- -- 10,095
Effect of convertible preferred stock under the
"if converted" method ........................................... -- -- 30,180,610
------------ ----------- ------------
Weighted average shares outstanding for diluted earnings
per share ....................................................... 19,775,821 19,627,132 49,648,094
============ =========== ============

The accompanying notes are an integral part of these consolidated financial
statements.

39

SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS EXCEPT SHARE DATA)

RESTATED ACCUMULATED
COMMON STOCK ADDITIONAL RESTATED OTHER
-------------------- PAID-IN ACCUMULATED COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT LOSS TOTAL INCOME (LOSS)
---------- ------ ---------- ----------- ------------- -------- -------------

BALANCE, January 1, 2001
As previously reported
(unaudited)................... 19,435,781 $39 $109,086 $(55,560) $ -- $ 53,565
Revisions (See Note 1)
(unaudited)................... -- -- (3,938) 3,938 -- --
---------- --- -------- -------- ------- --------
BALANCE, January 1, 2001, as
restated (unaudited)............ 19,435,781 $39 $105,148 $(51,622) $ -- $ 53,565
Change in other comprehensive
loss (unaudited) ............. -- -- -- -- (2,310) (2,310) $ (2,310)
Preferred stock dividends
(see Note 1) (unaudited) ...... -- -- (7,248) -- -- (7,248) (7,248)
Exercise of options and
warrants (unaudited) ......... 41,000 -- 82 -- -- 82 --
Net income before preferred
stock dividends (unaudited) .. -- -- -- 17,803 -- 17,803 17,803
---------- --- -------- -------- ------- -------- --------
BALANCE, December 31, 2001
(restated).................... 19,476,781 39 97,982 (33,819) (2,310) 61,892 $ 8,245
---------- --- -------- -------- ------- -------- ========
Change in other comprehensive
income ....................... -- -- -- -- 504 504 $ 504
Preferred stock dividends
(see Note 1)................... -- -- (7,659) -- -- (7,659) (7,659)
Exercise of options and
warrants ..................... 299,040 1 (1) -- -- -- --
Net income before preferred
stock dividends .............. -- -- -- 11,064 -- 11,064 11,064
---------- --- -------- -------- ------- -------- --------
BALANCE, December 31, 2002
(restated).................... 19,775,821 40 90,322 (22,755) (1,806) 65,801 $ 3,909
---------- --- -------- -------- ------- -------- ========
Change in other comprehensive
income ....................... -- -- -- -- 504 504 $ 504
Preferred stock dividends
(see Note 1)................... -- -- (8,209) -- -- (8,209) (8,209)
Net income before preferred
stock dividends .............. -- -- -- 7,278 -- 7,278 7,278
---------- --- -------- -------- ------- -------- --------
BALANCE, December 31, 2003 ....... 19,775,821 $40 $ 82,113 $(15,477) $(1,302) $ 65,374 $ (427)
========== === ======== ======== ======= ======== ========

The accompanying notes are an integral part of these consolidated financial
statements.

40

SYNAGRO TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
----------------------------------------------
2003 2002 2001
-------- --------- -----------
(UNAUDITED)

Cash flows from operating activities:
Net income (loss) applicable to common stock ............................. $ (931) $ 3,405 $ 10,555
Adjustments to reconcile net income applicable to common
stock to net cash provided by operating activities:
Preferred stock dividends ........................................... 8,209 7,659 7,248
Cumulative effect of change in accounting for derivatives ........... -- -- 1,861
Cumulative effect of change in accounting for asset
retirement obligations ........................................... 476 -- --
Bad debt expense .................................................... 952 -- --
Reorganization costs ................................................ 1,169 905 --
Depreciation and amortization expense ............................... 18,626 15,288 13,579
Amortization of debt financing costs ................................ 1,140 1,376 6,454
Write off of deferred debt costs .................................... -- 7,241 --
Provision for deferred income taxes ................................. 5,318 6,784 573
Loss (gain) on sale of property, machinery and equipment ............ 7 (244) (221)
Increase (decrease) in the following, net:
Accounts receivable .............................................. (5,633) (4,693) (406)
Prepaid expenses and other current assets ........................ 3,526 (8,661) (3,211)
Increase (decrease) in the following:
Accounts payable and accrued expenses and
other long-term liabilities ................................... (8,710) 590 1,777
-------- --------- --------
Net cash provided by operating activities ................................ 24,149 29,650 38,209
-------- --------- --------

Cash flows from investing activities:
Purchase of businesses, including contingent consideration,
net of cash acquired ................................................ (4,634) (4,553) (1,709)
Purchases of property, machinery and equipment ........................ (13,158) (12,534) (13,313)
Proceeds from sale of property, machinery and equipment ............... 14,207 602 968
Facility construction funded by restricted cash ...................... (5,270) -- --
Decrease in restricted cash for facility construction ................. 5,270 -- --
Other ................................................................. 213 (204) 4
-------- --------- --------
Net cash used in investing activities ....................................... (3,372) (16,689) (14,050)
-------- --------- --------

Cash flows from financing activities:
Payments of debt ...................................................... (20,816) (226,745) (27,079)
Debt issuance costs ................................................... (774) (7,310) (72)
(Increase) decrease in restricted cash for debt service ............... 780 1,081 (1,435)
Proceeds from debt .................................................... -- 220,000 --
Exercise of options and warrants ...................................... -- -- 82
-------- --------- --------
Net cash used in financing activities .................................... (20,810) (12,974) (28,504)

Net decrease in cash and cash equivalents ................................... (33) (13) (4,345)
Cash and cash equivalents, beginning of period .............................. 239 252 4,597
-------- --------- --------
Cash and cash equivalents, end of period .................................... $ 206 $ 239 $ 252
======== ========= ========

Supplemental cash flow information:
Interest paid during the period .......................................... $ 21,437 $ 20,035 $ 25,577
Income taxes paid during the period ...................................... $ 247 $ 361 $ 276

Noncash activities:
Fair value of guaranteed lease residual .................................. $ 399 $ -- $ --

41

NONCASH INVESTING AND FINANCING ACTIVITIES

During 2001, dividends totaled approximately $7.2 million, of which
approximately $6.1 million represents the eight percent dividend on the
Company's Preferred Stock that was provided for with additional shares of
preferred stock, and approximately $1.1 million represents accretion and
amortization of issuance costs (unaudited).

During 2002, dividends totaled approximately $7.7 million, of which
approximately $6.6 million represents the eight percent dividend on the
Company's Preferred Stock that was provided for with additional shares of
preferred stock, and approximately $1.1 million represents accretion and
amortization of issuance costs.

During 2002, the Company issued nonrecourse bonds totaling $21.3 million
to fund the capital to build a biosolids, dewatering and heat drying/pelletizing
facility for the Sacramento Regional Sanitation District.

During 2002, the Company issued an aggregate of 299,040 shares relating to
cashless exercises of certain warrants pursuant to an exemption from
registration under Section 3(a)(9) of the Securities Act.

During 2002, the Company entered into three capital lease agreements to
purchase transportation equipment totaling approximately $9.3 million.

During 2003, dividends totaled approximately $8.2 million, of which
approximately $7.2 million represents the eight percent dividend on the
Company's preferred stock that was paid with additional shares of preferred
stock, and approximately $1.0 million represents accretion and amortization of
issuance costs.

During 2003, the Company entered into capital lease agreements of
approximately $8.0 million to purchase operating and transportation equipment.

The accompanying notes are an integral part of these consolidated financial
statements.

42

' SYNAGRO TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

RESTATEMENT OF 2002 AND 2001 FINANCIAL STATEMENTS

In our financial statements for the years ended December 31, 2002 and
2001, we deducted our preferred stock dividends related to our redeemable
preferred stock from our accumulated deficit in our consolidated balance sheets
and our consolidated statements of stockholders' equity. We recently became
aware that SEC rules require that when a company has an accumulated deficit,
preferred stock dividends should be deducted from additional paid in capital.
Therefore, we have revised our financial statements to deduct preferred stock
dividends previously charged to accumulated deficit from additional paid in
capital. This revision has no impact on our total consolidated stockholders'
equity. The revision also had no effect on our consolidated statements of
operations or statements of cash flows for 2002 or 2001.

This table recaps the adjustments related to the revision of our preferred
stock dividends for the periods presented (in thousands):

Our financial statements for the year ended December 31, 2001, were
audited by Arthur Andersen LLP, who issued an unqualified opinion on our 2001
financial statements. Since Arthur Andersen has ceased operations, they are no
longer available to audit the revised reporting of the preferred stock dividends
and re-issue their audit report. As we were unable to have the adjustments
pertaining to our 2001 financial statements audited by our filing deadline, the
Arthur Andersen unqualified opinion has been removed and our 2001 financial
statements and related note disclosures contained herein are unaudited and are
labeled as such. As a result, this Annual Report on Form 10-K does not
completely satisfy the financial statement requirements of Regulation S-X.

Since we are unable to file three years of audited financial information
in this 2003 Annual Report on Form 10-K as required under Rules 3-01 and 3-02 of
Regulation S-X, our reports filed under the Securities Exchange Act of 1934 (the
"Exchange Act") will not be in full compliance with the requirements of the
Exchange Act. As a result, the effectiveness of our Registration Statement on
Form S-8 (No. 333-64999) will be suspended, and we will be unable to issue
shares under our stock option plans and agreements. In addition, we will not be
in compliance with Item 13(a) (1) of Schedule 14A under the Exchange Act in
connection with our solicitation of proxies for our 2004 annual meeting of
shareholders. During any period when we are not current with our SEC reports,
neither our affiliates nor any person that purchased shares from us in a private
offering during the preceding two years will be able to sell their shares in
public markets pursuant to Rule 144 under the Securities Act of 1933.

Because of the recent identification of this issue, it was impracticable
to complete a re-audit of our 2001 financial statements by our filing deadline.
While the consolidated financial statements for 2001 are unaudited, they include
all adjustments (consisting of a normal and recurring nature) that are, in the
opinion of management, necessary for a fair presentation of the financial
condition, results of operations, and cash flows for that year. The consolidated
financial statements for the fiscal years ended 2003 and 2002 have been audited
by PricewaterhouseCoopers LLP.

BUSINESS AND ORGANIZATION

Synagro Technologies, Inc., a Delaware corporation ("Synagro"), and
collectively with its subsidiaries (the "Company") is a national water and
wastewater residuals management company serving more than 1,000 municipal and
industrial water and wastewater treatment accounts and has operations in 37
states and the District of Columbia. Synagro offers many services that focus on
the beneficial reuse of organic nonhazardous residuals resulting from the
wastewater treatment process. Synagro provides its customers with complete,
vertically integrated services and capabilities, including facility operations,
facility cleanout services, regulatory compliance, dewatering, collection and
transportation, composting, drying and pelletization, product marketing,
incineration, alkaline stabilization, and land application.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Synagro and
its wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated.

CASH EQUIVALENTS

The Company considers all investments with an original maturity of three
months or less when purchased to be cash equivalents.

PROPERTY, MACHINERY AND EQUIPMENT

Property, machinery and equipment are stated at cost less accumulated
depreciation. Depreciation is being recorded using the straight-line method over
estimated useful lives of three to thirty years, net of estimated salvage
values. Leasehold improvements are capitalized and amortized over the lesser of
the life of the lease or the estimated useful life of the asset.

Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property, machinery and equipment, the cost and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is recognized in other income or expense in the statements of
operations.

Interest is capitalized on certain assets under construction.
Approximately $1.1 million of capitalized interest was recorded in construction
in process as of December 31, 2003.

GOODWILL

Goodwill represents the excess of aggregate purchase price paid by the
Company in acquisitions accounted for as purchases over the fair value of the
net tangible assets acquired. Effective January 1, 2002, the Company
discontinued amortization of goodwill in accordance with its adoption of
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets."

Goodwill attributable to the Company's reporting units is tested for
impairment by comparing the fair value of each reporting unit with its carrying
value. Significant estimates used in the determination of fair value include
estimates of future cash flows, future growth rates, costs of capital and
estimates of market multiples. As required under current accounting standards,
the Company tests for impairment annually unless factors otherwise indicate that
an impairment may have occurred.

NONCOMPETE AGREEMENTS

Included in other assets are noncompete agreements. These agreements are
amortized on a straight-line basis over the term of the agreement, which is
generally for two to ten years after the employee has separated from the
Company. Noncompete agreements, net of accumulated amortization at December 31,
2003 and 2002, totaled approximately $0.2 million and $0.3 million,
respectively. Amortization expense was approximately $0.1 million in 2003, $0.1
million in 2002, and $0.1 million in 2001 (unaudited).

43

SELF-INSURANCE LIABILITIES

The Company is substantially self-insured for worker's compensation,
employer's liability, auto liability, general liability and employee group
health claims in view of the relatively high per-incident deductibles the
Company absorbs under its insurance arrangements for these risks. Losses up to
deductible amounts are estimated and accrued based upon known facts, historical
trends, industry averages and actuarial assumptions regarding future claims
development and claims incurred but not reported.

DEFERRED FINANCING COSTS

Deferred financing costs, net of accumulated amortization at December 31,
2003 and 2002, totaled approximately $8.5 million and $8.6 million,
respectively, and are included in other assets. Deferred financing costs are
amortized to interest expense on a straight-line basis over the life of the
underlying instruments, which is not materially different from the effective
interest method.

REVENUE RECOGNITION

Revenues generated from facilities operations and maintenance contracts
are recognized either when wastewater residuals enter the facilities or when the
residuals have been processed, depending on the contract terms. All other
revenues under service contracts are recognized when the service is performed.
Revenues related to long-term construction projects are recognized under
percentage-of-completion accounting rules.

The Company provides for losses in connection with long-term contracts
where an obligation exists to perform services and when it becomes evident the
projected contract costs exceed the related revenues.

USE OF ESTIMATES

In preparing financial statements in conformity with accounting principles
generally accepted in the United States, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following are the Company's significant estimates and assumptions made in
preparation of its financial statements:

Allowance for Doubtful Accounts -- The Company estimates losses for
uncollectible accounts based on the aging of the accounts receivable and
the evaluation and the likelihood of success in collecting the receivable.
Allowance for doubtful accounts at December 31, 2003 and 2002, was
approximately $1.5 million and $1.3 million, respectively.

Loss Contracts -- The Company evaluates its revenue producing
contracts to determine whether the projected revenues of such contracts
exceed the direct cost to service such contracts. These evaluations
include estimates of the future revenues and expenses. Accruals for loss
contracts are adjusted based on these evaluations.

Property and Equipment/Long-Lived Assets -- Management adopted SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
during the first quarter of 2002. Property and equipment is reviewed for
impairment pursuant to these provisions. The carrying amount of an asset
(group) is considered impaired if it exceeds the sum of our estimate of
the undiscounted future cash flows expected to result from the use and
eventual disposition of the asset (group), excluding interest charges.

The Company regularly incurs costs to develop potential projects or
facilities and procure contracts for the design, permitting, construction and
operations of facilities. The Company has recorded $14.7 million in property and
long-term assets related to these activities at December 31, 2003, compared to
$8.8 million at December 31, 2002. The Company routinely reviews the status of
each of these projects to determine if these costs are realizable. If the
Company is unsuccessful in obtaining the required permits, government approvals,
or fulfilling the contract requirements, these costs will be expensed.

Goodwill - Goodwill attributable to the Company's reporting units is
tested for impairment by comparing the fair value of each reporting unit
with its carrying value. Significant estimates used in the determination
of fair value include estimates of future cash flows, future growth rates,
costs of capital and estimates of market multiples. As required under
current accounting standards, the Company tests for impairment annually
unless factors otherwise indicate that an impairment may have occurred.

44

Purchase Accounting -- The Company estimates the fair value of
assets, including property, machinery and equipment and its related useful
lives and salvage values, and liabilities when allocating the purchase
price of an acquisition to the acquired assets and liabilities.

Income Taxes -- The Company assumes the deductibility of certain
costs in its income tax filings and estimates the recovery of deferred
income tax assets. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods
in which the activity underlying these assets become deductible. The
Company considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. If actual future taxable income differs from its estimates,
the company may not realize deferred tax assets to the extent it was
estimated.

Legal and Contingency Accruals -- The Company estimates and accrues
the amount of probable exposure it may have with respect to litigation,
claims and assessments. These estimates are based on management's facts
and the probabilities of the ultimate resolution of the litigation.

Self-Insurance Reserves -- The Company is substantially self-insured
for workers' compensation, employers' liability, auto liability, general
liability and employee group health claims in view of the relatively high
per-incident deductibles the Company absorbs under its insurance
arrangements for these risks. Losses up to deductible amounts are
estimated and accrued based upon known facts, historical trends, industry
averages and actuarial assumptions regarding future claims development and
claims incurred but not reported.

Actual results could differ materially from the estimates and
assumptions that the Company uses in the preparation of its financial
statements.

CONCENTRATION OF CREDIT RISK

The Company provides services to a broad range of geographical regions.
The Company's credit risk primarily consists of receivables from a variety of
customers including state and local agencies, municipalities and private
industries. The Company had one customer that accounted for approximately 17
percent, 15 percent and 14 percent of total revenue for the years ended December
31, 2003, 2002 and 2001, respectively. No other customers accounted for more
than ten percent of revenues. The Company reviews its accounts receivable and
provides estimates of allowances as deemed necessary.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, receivables, accounts
payable and accrued liabilities approximate their fair values because of the
short-term nature of these instruments. With the exception of the $150 million
Senior Subordinated Notes, management believes the carrying amounts of the
current and long-term debt approximate their fair value based on interest rates
for the same or similar debt offered to the Company having the same or similar
terms and maturities. As of December 31, 2003, the fair value of the $150
million Senior Subordinated Notes totaled approximately $165 million.

INCOME TAXES

The Company files a consolidated return for federal income tax purposes.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This standard provides the method for determining
the appropriate asset and liability for deferred income taxes, which are
computed by applying applicable tax rates to temporary differences. Therefore,
expenses recorded for financial statement purposes before they are deducted for
income tax purposes create temporary differences, which give rise to deferred
income tax assets. Expenses deductible for income tax purposes before they are
recognized in the financial statements create temporary differences which give
rise to deferred income tax liabilities.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires all business combinations initiated
after June 30, 2001, to be accounted for using the purchase method. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are reviewed annually (or more frequently if impairment indicators
arise) for impairment. Separable intangible assets

45

that are not deemed to have indefinite lives will be amortized over their useful
lives. The Company completed the initial impairment test required by the
provisions of SFAS No. 142 as of January 1, 2002, and determined that there was
no impairment of the Company's goodwill.

Effective January 1, 2002, the Company discontinued the amortization of
goodwill in accordance with its adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets." The following table provides pro forma disclosure of net
income (loss) and earnings (loss) per share for the year ended December 31,
2001, as if goodwill had not been amortized and disclosure of actual results for
the years ended December 31, 2003 and 2002, for comparative purposes:

YEAR ENDED
DECEMBER 31,
------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
2003 2002 2001
------------ ------------- ------------
(UNAUDITED)

Reported net income (loss) applicable to common stock ...... $ (931) $ 3,405 $ 10,555
Add back: Goodwill amortization, net of tax ............... -- -- 3,314
------------ ------------- ------------
Adjusted net income (loss) ................................. $ (931) $ 3,405 $ 13,869
============ ============= ============

Basic income (loss) per share:
Reported earnings (loss) per share ..................... $ (0.05) $ 0.17 $ 0.54
Adjusted earnings (loss) per share ..................... (0.05) 0.17 0.71

Diluted income (loss) per share:
Reported earnings (loss) per share ..................... $ (0.05) $ 0.17 $ 0.36
Adjusted earnings (loss) per share ..................... (0.05) 0.17 0.43

The changes in the carrying amount of goodwill for the years ended
December 31, 2003 and 2002, were as follows (in thousands):

Balance at January 1, 2002 .............. $ 163,739
Goodwill acquired during the year ....... 4,643
Adjustments ............................. 82
-------------
Balance at January 1, 2003 .............. 168,464
Goodwill acquired during the year ....... 3,150
Adjustments ............................. 784
-------------
Balance at December 31, 2003 ............ $ 172,398
=============

The goodwill acquired during the year relates to the Company's acquisition
of Aspen Resources, Inc. ("Aspen") (see Note 2), while goodwill adjustments
primarily represent payments of contingent consideration made on acquisitions
prior to 2003.

In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statement Nos. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections." Among other things, SFAS No. 145 requires that gains and
losses from extinguishment of debt be classified as extraordinary items only if
they meet the criteria in Accounting Principles Board ("APB") Opinion No. 30.
SFAS No. 145 is effective for the Company beginning January 1, 2003. As a result
of this statement, the Company reclassified its write off of $7.2 million of
deferred debt costs that it originally recorded in 2002 as an extraordinary loss
on early extinguishment of debt of $7.2 million, net of taxes of $2.8 million,
to other expense and provision for income taxes, respectively, in the
accompanying consolidated statement of operations for 2002.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. The
Company adopted SFAS No. 146 during the first quarter of 2003 and there was no
effect on the Company's results of operations and financial position.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34. FIN
45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to the guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. The Company adopted the disclosure requirements of
FIN 45 for the year ended December 31, 2002. Additionally, on January 1, 2003,
the accounting requirements were adopted with no effect on the Company's
financial position or results of operations.

46

During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123, which is effective for fiscal years beginning after
December 15, 1995, establishes financial accounting and reporting standards for
stock-based employee compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods and services from nonemployees.
SFAS No. 123 requires, among other things, that compensation cost be calculated
for fixed stock options at the grant date by determining fair value using an
option-pricing model. The Company has the option of recognizing the compensation
cost over the vesting period as an expense in the income statement or making pro
forma disclosures in the notes to the financial statements for employee
stock-based compensation.

The Company continues to apply APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized in the accompanying condensed consolidated financial
statements for its stock option plans. Had the Company elected to apply SFAS No.
123, the Company's net income and income per diluted share would have
approximated the pro forma amounts indicated below:

YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
2003 2002 2001
----------- ---------- ----------
(UNAUDITED)

Net income (loss) applicable to common stock,
as reported .................................................... $ (931) $ 3,405 $ 10,555
Less: Compensation expense per SFAS No. 123,
net of tax ..................................................... $ 2,390 $ 2,697 $ 4,122
Pro forma income (loss) after effect of SFAS No. 123 ............. $ (3,321) $ 708 $ 6,433
Diluted earnings (loss) per share, as reported ................... $ (0.05) $ 0.17 $ 0.36
Pro forma earnings (loss) per share after effect of
SFAS No. 123 ................................................... $ (0.17) $ 0.04 $ 0.13

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model resulting in a weighted average
fair value of $1.63, $1.35 and $1.49 for grants made during the years ended
December 31, 2003, 2002, and 2001, respectively. The following assumptions were
used for option grants made during 2003, 2002, and 2001, respectively: expected
volatility of 58 percent, 42 percent and 82 percent; risk-free interest rates of
3.98 percent, 5.20 percent and 4.97 percent; expected lives of up to ten years
and no expected dividends to be paid. The compensation expense included in the
above pro forma data may not be indicative of amounts to be included in future
periods as the fair value of options granted prior to 1995 was not determined
and the Company expects future grants.

On January 1, 2003, the Company adopted SFAS No. 143, "Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and a corresponding increase in the carrying amount of the related
long-lived asset. Subsequently, the asset retirement cost should be allocated to
expense using a systematic and rational method. The Company's asset retirement
obligations primarily consist of equipment dismantling and foundation removal at
certain facilities and temporary storage facilities. During the first quarter of
2003, the Company recorded a charge related to the cumulative effect of change
in accounting for asset retirement obligations, net of tax, totaling
approximately $0.5 million (approximately $0.8 million before tax), increased
liabilities to approximately $1.6 million, and increased property, plant and
equipment by approximately $0.5 million. There was no impact on the Company's
cash flows as a result of adopting SFAS No. 143. The pro forma asset retirement
obligation would have been approximately $1.4 million at January 1, 2001, and
approximately $1.5 million and $1.6 million at December 31, 2001 and 2002,
respectively, had the Company adopted SFAS No. 143 on January 1, 2001
(unaudited). The asset retirement obligation, which is included on the
consolidated balance sheet in other long-term liabilities including accretion of
approximately $0.1 million, was approximately $1.7 million at December 31, 2003.

The pro forma effect on net income before preferred stock dividends, net
income applicable to common stock and income per share had SFAS No. 143 been
adopted as of January 1, 2001, would have been as follows:

47

YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------- ----------------------
AS PRO AS PRO
REPORTED FORMA REPORTED FORMA
-------- ------- -------- -------
(in thousands except per share data)
(unaudited)

Net income before preferred stock dividend .... $11,064 $10,882 $17,803 $17,374
Income applicable to common stock ............. $ 3,405 $ 3,223 $10,555 $10,126
Income per share:
Basic ...................................... $ 0.17 $ 0.16 $ 0.54 $ 0.52
Diluted .................................... $ 0.17 $ 0.16 $ 0.36 $ 0.35

In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN No. 46"). FIN No. 46 defines
a variable interest entity as an entity in which equity investors do not have
the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46
requires an entity to consolidate a variable interest entity if that entity will
absorb a majority of the variable interest entity's expected losses if they
occur, receive a majority of the variable interest entity's expected residual
returns if they occur, or both. FIN No. 46 is effective for all new variable
interest entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of the pronouncement were initially to be effective for the first interim or
annual period beginning after June 15, 2003. However, in October 2003, the FASB
delayed the effective date of FIN No. 46 on these entities to the first period
beginning after December 15, 2003. We determined that we do not have any
variable interest entities at December 31, 2003, as defined by the
pronouncement.

In May 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133. This statement is effective for contracts
entered into or modified after September 30, 2003, (except for certain
exceptions) and for hedging relationships designated after September 30, 2003.
The Company adopted SFAS No. 149 in the fourth quarter of 2003 and there was no
effect on the Company's results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 established standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003, and must be applied prospectively by reporting the cumulative effect
of a change in an accounting principle for financial instruments created before
the issuance date of the statement and still existing at the beginning of the
interim period of adoption.

While the Company does have mandatory redeemable preferred stock with
characteristics of both liabilities and equity, the Series D and Series E
preferred stock is also convertible to shares of the Company's common stock at
the option of the holder up until the mandatory redemption date. Additionally,
the option feature held by the holder is considered to be substantive as the
conversion price was less than the market price at the date of issuance. Based
on the above features of the preferred stock, the adoption of SFAS No. 150 did
not have a material effect on our financial position or results of operations.

RECLASSIFICATIONS

Certain reclassifications have been made in prior period financial
statements to conform to current period presentation. These reclassifications
have not resulted in any changes to previously reported net income for any
periods.

(2) ACQUISITIONS

2003 ACQUISITION

In May 2003, the Company purchased Aspen Resources, Inc. The purchase of
Aspen provides the Company with added expertise in the management of pulp and
paper organic residuals. The allocation of purchase price resulted in
approximately $3.2 million of goodwill. The assets acquired and liabilities
assumed relating to the acquisition are summarized below (in thousands):

48

Cash paid, including transaction costs, net of cash acquired......... $ 3,832
Note payable to former owner......................................... 500
Less: Net assets acquired........................................... (1,182)
------------
Goodwill............................................................. $ 3,150
============

If certain post-closing conditions are met as defined in the purchase
agreement, the note payable to the former owners is due in equal, monthly
installments with interest payable at an annual rate of five percent. The
Company currently believes these post-closing conditions will be met.

49

2002 ACQUISITION

In August 2002, the Company purchased Earthwise Organics, Inc. and
Earthwise Trucking (collectively "Earthwise"), a Class A biosolids and manure
composting and marketing company. The purchase of Earthwise provides the Company
with a distribution channel for Class A products and a strategic platform to
grow the Company's product marketing presence. In connection with the purchase
of Earthwise, the former owners are entitled to receive up to an additional $4.0
million subsequent to August 2005 if certain performance targets are met over
this three-year period. The allocation of the purchase price resulted in
approximately $4.9 million of goodwill subject to future payments to the former
owners described above. The assets acquired and liabilities assumed relating to
the acquisition are summarized below (in thousands):

Cash paid, including transaction costs, net of cash acquired ......... $ 3,580
Note payable to former owner ......................................... 1,500
Less: Net assets acquired ............................................ (219)
-----------
Goodwill ............................................................. $ 4,861
===========

The note payable to the former owners is due in three equal, annual
installments beginning in October 2003, with interest payable quarterly at a
rate of five percent. The first payment was made September 30, 2003.

Results of operations of Aspen and Earthwise are included in the
accompanying consolidated statements of operations as of May 7, 2003,
and August 26, 2002, respectively. Pro forma results of operations, as if these
entities had been acquired as of the beginning of their respective acquisition
years, have not been presented as such results are not considered to be
materially different from the Company's actual results.

(3) PROPERTY, MACHINERY AND EQUIPMENT

Property, machinery and equipment consist of the following:

DECEMBER 31,
ESTIMATED USEFUL -------------------------------
LIFE-IN YEARS 2003 2002
---------------- -------------- -------------
(IN THOUSANDS)

Land ..................................... N/A $ 3,623 $ 3,568
Buildings and improvements ............... 7-25 33,684 32,740
Machinery and equipment .................. 3-30 218,558 211,161
Office furniture and equipment ........... 3-10 5,427 3,843
Construction in process .................. -- 11,542 6,159
-------------- -------------
$ 272,834 $ 257,471
Less: Accumulated depreciation .......... 59,137 44,140
-------------- -------------
Property, machinery and equipment, net ... $ 213,697 $ 213,331
============== =============

(4) DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Activity of the Company's allowance for doubtful accounts consists of the
following:

DECEMBER 31,
-------------------------------------------
2003 2002 2001
------------ ------------ ------------
(UNAUDITED)
(IN THOUSANDS)

Balance at beginning of year ................................. $ 1,331 $ 2,165 $ 1,701
Uncollectible receivables written off ........................ (753) (869) --
Additions for bad debt expense ............................... 952 -- --
Allowance for doubtful accounts established through
purchase accounting ........................................ -- 35 463
------------ ------------ ------------
Balance at end of year ....................................... $ 1,530 $ 1,331 $ 2,164
============ ============ ============

Accounts payable and accrued expenses consist of the following:

50

DECEMBER 31,
-----------------------------
2003 2002
------------- -------------
(IN THOUSANDS)

Accounts payable ......................... $ 26,519 $ 30,341
Accrued legal and other claims costs ..... 1,426 799
Accrued interest ......................... 4,222 4,253
Accrued salaries and benefits ............ 2,727 3,591
Accrued insurance ........................ 3,134 2,189
Other accrued expenses ................... 9,451 7,639
------------- -------------
Total .................................... $ 47,479 $ 48,812
============= =============

(5) LONG-TERM DEBT OBLIGATIONS

Long-term debt obligations consist of the following:

DECEMBER 31,
-----------------------------------
2003 2002
--------------- ---------------
(IN THOUSANDS)

Credit facility -- term loans ............................ $ 44,274 $ 60,336
Subordinated debt ........................................ 150,000 150,000
Fair value adjustment of subordinated debt
as a result of interest rate swaps ................... (755) --
Notes payable to former owners ........................... 1,500 1,500
Other notes payable ...................................... 20 26
--------------- ---------------
Total debt ..................................... $ 195,039 $ 211,862
Less: Current maturities ................................. (955) (1,111)
--------------- ---------------
Long-term debt, net of current maturities ...... $ 194,084 $ 210,751
=============== ===============

CREDIT FACILITY

On January 27, 2000, the Company entered into a $110 million amended and
restated Senior Credit Agreement (the "Senior Credit Agreement") by and among
the Company, Bank of America, N.A., and certain other lenders to fund working
capital for acquisitions, to refinance existing debt, to provide working capital
for operations, to fund capital expenditures and other general corporate
purposes. The Senior Credit Agreement was subsequently syndicated on March 15,
2000, and was amended August 14, 2000, and February 25, 2002, to increase the
capacity. The Senior Credit Agreement was amended and restated on May 8, 2002.
The Senior Credit Agreement bears interest at LIBOR or prime plus a margin based
on a pricing schedule as set out in the Senior Credit Agreement.

During May 2003, the Company further amended its credit facility to
increase the revolving loan commitment to approximately $95 million.

The loan commitments under the Senior Credit Agreement are as follows:

(i) Revolving Loan up to $95 million outstanding at any time;

(ii) Term B Loans (which, once repaid, may not be reborrowed) of $70
million; and

(iii) Letters of Credit up to $50 million as a subset of the Revolving
Loan. At December 31, 2003, the Company had approximately $29.1
million of Letters of Credit outstanding.

51

The total credit facility can be increased to $150 million upon the
request of the Company and bank approval. The amounts borrowed under the Senior
Credit Agreement are subject to repayment as follows:

REVOLVING TERM
PERIOD ENDING DECEMBER 31, LOAN LOANS
------------------------------------------ ---------- ---------

2002 ..................................... -- 0.25%
2003 ..................................... -- 1.00%
2004 ..................................... -- 1.00%
2005 ..................................... -- 1.00%
2006 ..................................... -- 1.00%
2007 ..................................... 100.00% 1.00%
2008 ..................................... -- 94.75%
---------- ---------
100.00% 100.00%
========== =========

The Senior Credit Agreement includes mandatory repayment provisions
related to excess cash flows, proceeds from certain asset sales, debt issuances
and equity issuances, all as defined in the Senior Credit Agreement. These
mandatory repayment provisions may also reduce the available commitment. The
Senior Credit Agreement contains standard covenants including compliance with
laws, limitations on capital expenditures, restrictions on dividend payments,
limitations on mergers and compliance with financial covenants. The Company was
in compliance with those covenants as of December 31, 2003. The Senior Credit
Agreement is collateralized by all the assets of the Company and expires on
December 31, 2008. As of December 31, 2003, the Company had approximately $65.9
million of unused borrowings under the Senior Credit Agreement, of which
approximately $28.3 million is available for borrowing based on the ratio
limitations included in the Senior Credit Agreement. On March 9, 2004, the
Company amended its credit facility to, among other things, exclude certain
charges from its financial covenant calculations, to clarify certain defined
terms, to increase the amount of indebtedness permitted under its total leverage
ratio, and to reset capital and operating lease limitations.

SENIOR SUBORDINATED NOTES

In April 2002, the Company issued $150 million in principal amount of its
9 1/2 percent Senior Subordinated Notes due on April 1, 2009 (the "Notes"). The
Notes are unsecured senior indebtedness and are guaranteed by all of the
Company's existing and future domestic subsidiaries, other than subsidiaries
treated as unrestricted subsidiaries ("the Guarantors"). As of December 31,
2003, all subsidiaries, other than the subsidiaries formed to own and operate
the Sacramento dryer project, Synagro Organic Fertilizer Company of Sacramento,
Inc. and Sacramento Project Finance, Inc. (see Note 18), were Guarantors of the
Notes. Interest on the Notes accrues from April 17, 2002, and is payable
semi-annually on April 1 and October 1 of each year, commencing October 1, 2002.
On or after April 1, 2006, the Company may redeem some or all of the Notes at
the redemption prices (expressed as percentages of principal amount) listed
below, plus accrued and unpaid interest and liquidated damages, if any, on the
Notes redeemed, to the applicable date of redemption, if redeemed during the
12-month period commencing on April 1 of the years indicated below:

YEARS LOAN
------------------------------------------ --------

2006 ..................................... 104.750%
2007 ..................................... 102.375%
2008 and thereafter ...................... 100.000%

At any time prior to April 1, 2005, the Company may redeem up to 35
percent of the original aggregate principal amount of the Notes at a premium of
9 1/2 percent with the net cash of public offerings of equity, provided that at
least 65 percent of the original aggregate principal amount of the Notes remains
outstanding after the redemption. Upon the occurrence of specified change of
control events, unless the Company has exercised its option to redeem all the
Notes as described above, each holder will have the right to require the Company
to repurchase all or a portion of such holder's Notes at a purchase price in
cash equal to 101 percent of the aggregate principal amount of the Notes
repurchased plus accrued and unpaid interest and liquidated damages, if any, on
the Notes repurchased, to the applicable date of purchase. The Notes were issued
under an indenture, dated as of April 17, 2002, among the Company, the
Guarantors and Wells Fargo Bank Minnesota, National Association, as trustee (the
"Indenture"). The Indenture limits the ability of the Company and the restricted
subsidiaries to, among other things, incur additional indebtedness and issue
preferred

52

stock, pay dividends or make other distributions, make other restricted payments
and investments, create liens, incur restrictions on the ability of certain of
its subsidiaries to pay dividends or other payments to the Company, enter into
transactions with affiliates, and engage in mergers, consolidations and certain
sales of assets.

The Notes and the guarantees of the Guarantors are (i) unsecured; (ii)
subordinate in right of payment to all existing and future senior indebtedness
(including all borrowings under the new credit facility and surety obligations)
of Synagro and the Guarantors; (iii) equal in right of payment to all future and
senior subordinated indebtedness of Synagro and the Guarantors; and (iv) senior
in right of payment to future subordinated indebtedness of Synagro and the
Guarantors.

The net proceeds from the sale of the Notes was approximately $145
million, and were used to repay and refinance existing indebtedness under the
Company's previously existing credit facility and subordinated debt as of April
17, 2002.

SUBORDINATED DEBT

On January 27, 2000, the Company entered into an agreement with GTCR
Capital providing up to $125 million in subordinated debt financing to fund
acquisitions and for certain other uses, in each case as approved by the Board
of Directors of the Company and GTCR Capital. The agreement was amended on
August 14, 2000, allowing, among other things, for the syndication of 50 percent
of the commitment. The loans bore interest at an annual rate of 12 percent that
was paid quarterly and provided warrants that were convertible into Preferred
Stock at $.01 per warrant. The agreement contained general and financial
covenants. Warrants to acquire 9,225.839 shares of Series C, D, and E Preferred
Stock were issued in connection with these borrowings and were immediately
exercised. This debt was repaid with the proceeds from the issuance of the
Notes.

EARLY EXTINGUISHMENT OF DEBT

In conjunction with the issuance of the Notes and entering into the Senior
Credit Agreement, the Company paid the then outstanding subordinated debt and
credit facility. In 2002, the Company recognized a charge of approximately $7.2
million related to the write-off of unamortized deferred financing costs and the
difference in the debt carrying value affected by prior adjustments relating to
the reverse swap previously designated as a fair value hedge. In accordance with
SFAS No. 145, the Company reclassified its 2002 loss on early extinguishment of
debt from its previous presentation as an extraordinary item, net of tax, to
other expense and provision for income taxes, respectively. (See Note 1.)

NOTES PAYABLE TO SELLERS OF ACQUIRED BUSINESSES

In connection with the Aspen acquisition, the Company entered into a $0.5
million note payable with the former owners of Aspen. If certain post-closing
conditions are met, as defined in the purchase agreement, the note is payable
monthly with interest payable at an annual rate of five percent beginning in the
third quarter of 2004 through 2008. The Company currently believes these
conditions will be met.

In connection with the Earthwise acquisition, the Company entered into a
$1.5 million note payable with the former owners of Earthwise. The note is
payable in three equal, annual installments beginning in October 2003. Interest
is payable quarterly at an annual rate of five percent beginning October 1,
2002. The first payment was made on September 30, 2003.

DERIVATIVES AND HEDGING ACTIVITIES

On July 24, 2003, the Company entered into two interest rate swap
transactions with two financial institutions to hedge the Company's exposure to
changes in the fair value on $85 million of its Notes. The purpose of these
transactions was to convert future interest due on $85 million of the Notes to a
lower variable rate in an attempt to realize savings on the Company's future
interest payments. The terms of the interest rate swap contract and the
underlying debt instruments are identical. The Company has designated these swap
agreements as fair value hedges. The swaps have notional amounts of $50 million
and $35 million and mature in April 2009 to mirror the maturity of the Notes.
Under the agreements, the Company pays on a semi-annual basis (each April 1 and
October 1) a floating rate based on a six-month U.S. dollar LIBOR rate, plus a
spread, and receives a fixed-rate interest of 9 1/2 percent. During 2003, the
Company recorded interest savings related to these interest rate swaps of $1
million, which served to reduce interest expense. The $0.8 million fair value of
these derivative instruments is included in other long-term liabilities as of
December 31, 2003. The carrying value of the Company's Notes was decreased by
the same amount.

On June 25, 2001, the Company entered into a reverse swap on its 12
percent subordinated debt and used the proceeds from the reverse swap agreement
to retire previously outstanding floating-to-fixed interest rate swap agreements
(the "Retired Swaps") and

53

option agreements. Accordingly, the balance included in accumulated other
comprehensive loss included in stockholders' equity related to the Retired Swaps
is being recognized in future periods' income over the remaining term of the
original swap agreement. The amount of accumulated other comprehensive income
recognized for the year ended December 31, 2003, was approximately $0.5 million.

The 12 percent subordinated debt was repaid on April 17, 2002, with the
proceeds from the sale of the Notes. Accordingly, the Company discontinued using
hedge accounting for the reverse swap agreement on April 17, 2002. From April
17, 2002, through June 25, 2002, the fair value of this fixed-to-floating
reverse swap decreased by $1.7 million. This $1.7 million mark-to-market gain
was included in other income in the second quarter of 2002 financial statements.
On June 25, 2002, the Company entered into a floating-to-fixed interest rate
swap agreement that substantially offsets market value changes in the Company's
reverse swap agreement. The liability related to this reverse swap agreement and
the floating-to-fixed offset agreement totaling approximately $2.8 million is
reflected in other long-term liabilities at December 31, 2003. The loss
recognized during 2003 related to the floating-to-fixed interest rate swap
agreement was approximately $0.2 million, while the gain recognized related to
the reverse swap agreement was approximately $0.1 million. The amount of the
ineffectiveness of the reverse swap agreement charged to other expense was
approximately $0.1 million for the year ended December 31, 2003.

FUTURE PAYMENTS

At December 31, 2003, future minimum principal payments of long-term debt,
nonrecourse Project Revenue Bonds (see Note 6) and Capital Lease Obligations
(see Note 7) are as follows (in thousands):

NONRECOURSE CAPITAL
LONG-TERM PROJECT LEASE
YEAR ENDED DECEMBER 31, DEBT REVENUE BONDS OBLIGATIONS TOTAL
----------------------------------- ------------- -------------- ------------ -----------

2004 ............................... $ 955 $ 2,570 $ 2,678 $ 6,203
2005 ............................... 955 2,710 2,780 6,445
2006 ............................... 455 1,194 2,493 4,142
2007 ............................... 448 -- 3,211 3,659
2008 ............................... 42,981 1,332 3,823 48,136
2009-2013 .......................... 150,000 20,160 441 170,601
2014-2018 .......................... -- 26,209 -- 26,209
Thereafter ......................... -- 10,696 -- 10,696
------------- -------------- ------------ -----------
Total............................... $ 195,794 $ 64,871 $ 15,426 $ 276,091
============= ============== ============ ===========

(6) NONRECOURSE PROJECT REVENUE BONDS

DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
(IN THOUSANDS)

Maryland Energy Financing Administration Limited Obligation
Solid Waste Disposal Revenue Bonds, 1996 series --
Revenue bonds due 2001 to 2005 at stated interest
rates of 5.45% to 5.85% ................................................. $ 5,280 $ 7,710
Term revenue bond due 2010 at stated interest rate of 6.30% ............... 16,295 16,295
Term revenue bond due 2016 at stated interest rate of 6.45% ............... 22,360 22,360
-------- --------
43,935 46,365
California Pollution Control Financing Authority Solid Waste
Revenue Bonds --
Series 2002A -- Revenue bonds due 2008 to 2024 at
stated interest rates of 4.375% to 5.50% ................................ 19,741 19,715
Series 2002B-- Revenue bonds due 2006 at stated interest
rate of 4.25% ........................................................... 1,195 1,191
-------- --------
20,936 20,906
-------- --------
Total nonrecourse project revenue bonds ........................................ 64,871 67,271
Less: Current maturities ................................................. (2,570) (2,430)
-------- --------
Nonrecourse project revenue bonds, net of current maturities .............. $ 62,301 $ 64,841
======== ========

Amounts recorded in other assets as restricted cash -
debt service fund ......................................................... $ 7,275 $ 7,491
======== ========

54

In 1996, the Maryland Energy Financing Administration (the
"Administration") issued nonrecourse tax-exempt project revenue bonds (the
"Maryland Project Revenue Bonds") in the aggregate amount of $58.6 million. The
Administration loaned the proceeds of the Maryland Project Revenue Bonds to
Wheelabrator Water Technologies Baltimore L.L.C., now Synagro's wholly owned
subsidiary known as Synagro-Baltimore, L.L.C., pursuant to a June 1996 loan
agreement, and the terms of the loan mirror the terms of the Maryland Project
Revenue Bonds. The loan financed a portion of the costs of constructing thermal
facilities located in Baltimore County, Maryland, at the site of its Back River
Wastewater Treatment Plant, and in the City of Baltimore, Maryland, at the site
of its Patapsco Wastewater Treatment Plant. The Company assumed all obligations
associated with the Maryland Project Revenue Bonds in connection with its
acquisition of the Bio Gro division of Waste Management, Inc. ("Bio Gro") in
2000. Maryland Project Revenue Bonds in the aggregate amount of approximately
$14.6 million have already been repaid. The remaining Maryland Project Revenue
Bonds bear interest at annual rates between 5.75 percent and 6.45 percent and
mature on dates between December 1, 2004, and December 1, 2016.

The Maryland Project Revenue Bonds are primarily collateralized by the
pledge of revenues and assets related to our Back River and Patapsco thermal
facilities. The underlying service contracts between us and the City of
Baltimore obligated the Company to design, construct and operate the thermal
facilities and obligated the City to deliver biosolids for processing at the
thermal facilities. The City makes all payments under the service contracts
directly with a trustee for the purpose of paying the Maryland Project Revenue
Bonds.

At the Company's option, it may cause the redemption of the Maryland
Project Revenue Bonds at any time on or after December 1, 2006, subject to
redemption prices specified in the loan agreement. The Maryland Project Revenue
Bonds will be redeemed at any time upon the occurrence of certain extraordinary
conditions, as defined in the loan agreement.

Synagro-Baltimore, L.L.C. guarantees the performance of services under the
underlying service agreements with the City of Baltimore. Under the terms of the
Bio Gro acquisition purchase agreement, Waste Management, Inc. also guarantees
the performance of services under those service agreements. Synagro has agreed
to pay Waste Management $0.5 million per year beginning in 2007 until the
Maryland Project Revenue Bonds are paid or its guarantee is removed. Neither
Synagro-Baltimore, L.L.C nor Waste Management has guaranteed payment of the
Maryland Project Revenue Bonds or the loan funded by the Maryland Project
Revenue Bonds.

The loan agreement, based on the terms of the related indenture, requires
that Synagro place certain monies in restricted fund accounts and that those
funds be used for various designated purposes (e.g., debt service reserve funds,
bond funds, etc.). Monies in these funds will remain restricted until the
Maryland Project Revenue Bonds are paid.

At December 31, 2003, the Maryland Project Revenue Bonds were
collateralized by property, machinery and equipment with a net book value of
approximately $55.8 million and restricted cash of approximately $6.4 million,
of which approximately $5.6 million is in a debt service fund that is
established to partially secure certain payments and can be utilized to make the
final payment at the Company's request.

In December 2002, the California Pollution Control Financing Authority
(the "Authority") issued nonrecourse revenue bonds in the aggregate amount of
$20.9 million (net of original issue discount of $0.4 million). The nonrecourse
revenue bonds consist of $19.7 million (net of original issue discount of $0.4
million) Series 2002-A ("Series A") and $1.2 million (net of original issue
discount of $9,000) Series 2002-B ("Series B") (collectively, the "Bonds"). The
Authority loaned the proceeds of the Bonds to Sacramento Project Finance, Inc.,
a wholly owned subsidiary of the Company, pursuant to a loan agreement dated
December 1, 2002. The purpose of the loan is to finance the design, permitting,
constructing and equipping of a biosolids dewatering and heat drying/pelletizing
facility for the Sacramento Regional Sanitation District. The Bonds bear
interest at annual rates between 4.25 percent and 5.5 percent and mature on
dates between December 1, 2006, and December 1, 2024.

The Bonds are primarily collateralized by the pledge of certain revenues
and all of the property of Sacramento Project Finance, Inc. The facility will be
owned by Sacramento Project Finance, Inc. and leased to Synagro Organic
Fertilizer Company of Sacramento, Inc., a wholly owned subsidiary of the
Company. Synagro Organic Fertilizer Company of Sacramento, Inc. will be
obligated under a lease agreement dated December 1, 2002, to pay base rent to
Sacramento Project Finance, Inc. in an amount exceeding the debt service of the
Bonds. The facility will be located on property owned by the Sacramento Regional
County Sanitation District ("Sanitation District"). The Sanitation District will
provide the principal source of revenues to Synagro Organic Fertilizer Company
of Sacramento, Inc. through a service fee under a contract that has been
executed.

55

At the Company's option, it may cause the early redemption of some Series
A and Series B Bonds subject to redemption prices specified in the loan
agreement.

The loan agreement requires that Sacramento Project Finance, Inc. place
certain monies in restricted accounts and that those funds be used for
designated purposes (e.g., operation and maintenance expense account, reserve
requirement accounts, etc.). Monies in these funds will remain restricted until
the Bonds are paid.

At December 31, 2003, the Bonds are partially collateralized by restricted
cash of approximately $13.9 million, of which approximately $1.7 million is in a
debt service fund that was established to secure certain payments and can be
utilized to make the final payment at the Company's request, and the remainder
is reserved for construction costs expected to be incurred after notice to
proceed is received. The Company is not a guarantor of the Bonds or the loan
funded by the Bonds.

Nonrecourse Project Revenue Bonds are excluded from the financial covenant
calculations required by the Company's Senior Credit Facility.

(7) CAPITAL LEASE OBLIGATIONS

During 2003, the Company entered into various capital lease transactions
to purchase transportation and operating equipment. The capital leases have
lease terms of three to six years with interest rates from 5.0 percent to 7.18
percent. The net book value of the equipment related to these capital leases
totaled approximately $7.8 million as of December 31, 2003.

During 2002, the Company entered into capital lease agreements to purchase
transportation equipment. The lease terms are for three to six years with
interest rates from 6.03 percent to 8.61 percent. The net book value of the
equipment related to these capital leases totaled approximately $8.4 million as
of December 31, 2003. There were no capital leases at December 31, 2001.

Future minimum lease payments, together with the present value of the
minimum lease payments, are as follows (in thousands):

YEAR ENDED DECEMBER 31,
-----------------------

2004 ................................................. $ 3,600
2005 ................................................. 3,520
2006 ................................................. 3,059
2007 ................................................. 3,610
2008 ................................................. 3,823
Thereafter ........................................... 450
--------
Total minimum lease payments .............................. 18,062
Amount representing interest .............................. (2,636)
--------
Present value of minimum lease payments .............. 15,426
Current maturities of capital lease obligations ...... (2,678)
--------
Long-term capital lease obligations .................. $ 12,748
========

(8) INCOME TAXES

The following summarizes the provision for income taxes included in the
Company's consolidated statement of operations:

YEAR ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
------------ ----------- ----------
(UNAUDITED)
(IN THOUSANDS)

Provision for income taxes ........................... $ 5,225 $ 6,784 $ 573
Income tax benefit related to
cumulative effect of change in
accounting for asset retirement
obligations ........................................ (292) -- --
------------ ----------- ----------
$ 4,933 $ 6,784 $ 573
============ =========== ==========

56

Federal and state income tax provisions are as follows:

YEAR ENDED DECEMBER 31,
----------------------------------------
2003 2002 2001
---------- ------------ -----------
(UNAUDITED)
(IN THOUSANDS)

Federal:
Current .................... $ -- $ -- $ --
Deferred ................... 4,270 6,251 390
State:
Current .................... 419 137 175
Deferred ................... 244 396 8
---------- ------------ -----------
$ 4,933 $ 6,784 $ 573
========== ============ ===========

Actual income tax provision differs from income tax provision computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
before provision for income taxes as follows:

YEAR ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001
------- ------- -----------
(UNAUDITED)

Provision at the statutory rate ................................. 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net of benefit for federal deduction ...... 3.8% 2.7% 0.6%
Other items, net .............................................. 1.6% 0.3% (11.4)%
Change in accounting for derivatives .......................... 0.0% 0.0% (3.2)%
Special credits, net .......................................... 0.0% 0.0% (9.8)%
Change in valuation allowance ................................. 0.0% 0.0% (8.4)%
------- ------- -------
40.4% 38.0% 2.8%
======= ======= =======

Significant components of the Company's deferred tax assets and
liabilities for federal income taxes consist of the following (in thousands):

DECEMBER 31,
-----------------------------
2003 2002
------- --------
(IN THOUSANDS)

Deferred tax assets --
Net operating loss carryforwards .............................. $33,342 $ 31,840
Alternative minimum tax credit ................................ 40 40
Accruals not currently deductible for tax purposes ............ 3,438 3,755
Allowance for bad debts ....................................... 566 403
Other ......................................................... 1,212 1,402
------- --------
Total deferred tax assets .................................. 38,598 37,440
Valuation allowance for deferred tax assets ..................... -- (94)
Deferred tax liability --
Differences between book and tax bases of fixed assets ........ 39,651 35,900
Differences between book and tax bases of goodwill ............ 7,853 5,623
------- --------
Total deferred tax liabilities ............................. 47,504 41,523
------- --------
Net deferred tax liability ................................. $ 8,906 $ 4,177
======= ========

As of December 31, 2003, the Company had net operating loss ("NOL")
carryforwards of approximately $90.0 million available to reduce future income
taxes. These carryforwards begin to expire in 2008. A change in ownership, as
defined by federal income tax regulations, could significantly limit the
Company's ability to utilize its carryforwards. Accordingly, the Company's
ability to utilize its NOLs to reduce future taxable income and tax liabilities
may be limited. Additionally, because federal tax laws limit the time during
which these carryforwards may be applied against future taxes, the Company may
not be able to take full advantage of these attributes for federal income tax
purposes. The net deferred tax liability is recorded in other long-term
liabilities in the accompanying consolidated balance sheet.

57

(9) COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases certain facilities and equipment for its corporate and
operations offices under noncancelable long-term operating lease agreements.
Rental expense was approximately $7.5 million, $5.0 million and $4.8 million for
2003, 2002 and 2001, respectively. Minimum annual rental commitments under these
leases are as follows (in thousands):

YEAR ENDING DECEMBER 31,
------------------------

2004 ............................... $ 8,208
2005 ............................... 6,216
2006 ............................... 4,289
2007 ............................... 3,691
2008 ............................... 3,521
Thereafter ......................... 16,439
----------
$ 42,364
==========

During 2003, the Company entered into operating lease transactions to use
transportation and operating equipment. The operating leases have terms of two
to eight years. Additionally, the Company has guaranteed a maximum lease risk
amount to the lessor of one of the operating leases. The fair value of this
guaranty is approximately $0.4 million as of December 31, 2003.

CUSTOMER CONTRACTS

A substantial portion of the Company's revenue is derived from services
provided under contracts and written agreements with the Company's customers.
Some of these contracts, especially those contracts with large municipalities
(including our largest contract and at least four of the Company's top ten
contracts), provide for termination of the contract by the customer after giving
relatively short notice (in some cases as little as ten days). In addition,
these contracts contain liquidated damages clauses which may or may not be
enforceable in the case of early termination of the contracts. If one or more of
these contracts are terminated prior to the expiration of its term, and the
Company is not able to replace revenues from the terminated contracts or receive
liquidated damages pursuant to the terms of the contract, the lost revenue could
have a material and adverse effect on the Company's business, financial
condition and results of operations.

LITIGATION

The Company's business activities are subject to environmental regulation
under federal, state and local laws and regulations. In the ordinary course of
conducting its business activities, the Company becomes involved in judicial and
administrative proceedings involving governmental authorities at the federal,
state and local levels. The Company believes that these matters will not have a
material adverse effect on its business, financial condition and results of
operations. However, the outcome of any particular proceeding cannot be
predicted with certainty. The Company is required under various regulations to
procure licenses and permits to conduct its operations. These licenses and
permits are subject to periodic renewal without which its operations could be
adversely affected. There can be no assurance that regulatory requirements will
not change to the extent that it would materially affect the Company's
consolidated financial statements.

Riverside County

The parties have settled all pending litigation between the Company and
Riverside County. Synagro has agreed to pay host fees for biosolids received at
the facility and that the conditional use permit ("CUP") will expire December
31, 2008, which is nine months earlier than when it was originally set to
expire.

The Company leases land and operates a composting facility in Riverside
County, California, under a conditional use permit ("CUP"). The CUP allows for a
reduction in material intake and CUP term in the event of noncompliance with the
CUP's terms and conditions. In response to alleged noncompliance due to
excessive odor, on or about June 22, 1999, the Riverside County Board of
Supervisors attempted to reduce the Company's intake of biosolids from 500 tons
per Day to 250 tons per day. The Company believed

58

that this was not an authorized action by the Board of Supervisors. On September
15, 1999, the Company was granted a preliminary injunction restraining and
enjoining the County of Riverside ("County") from restricting the Company's
intake of biosolids at its Riverside composting facility.

In the lawsuit that the Company filed in the Superior Court of California,
County of Riverside, the Company also complained that the County's treatment of
the Company is in violation of its civil rights under U.S.C. Section 1983 and
that its due process rights were being affected because the County was
improperly administering the odor protocol, as well as other terms in the CUP.
The County alleged that the odor "violations," as well as the Company's actions
in not reducing intake, could reduce the term of the CUP. The Company disagreed
and challenged the County's position in the lawsuit.

The Company has incurred approximately $667,000 of project costs in
connection with the Company's efforts to relocate the facility prior to the
current settlement. Since the Company will now remain at the existing Riverside
County site, these costs were written off through depreciation expense in cost
of services in the fourth quarter of 2003.

Reliance Insurance

For the 24 months ended October 31, 2000 (the "Reliance Coverage Period"),
the Company insured certain risks, including automobile, general liability, and
worker's compensation, with Reliance National Indemnity Company ("Reliance")
through policies totaling $26 million in annual coverage. On May 29, 2001, the
Commonwealth Court of Pennsylvania entered an order appointing the Pennsylvania
Insurance Commissioner as Rehabilitator and directing the Rehabilitator to take
immediate possession of Reliance's assets and business. On June 11, 2001,
Reliance's ultimate parent, Reliance Group Holdings, Inc., filed for bankruptcy
under Chapter 11 of the United States Bankruptcy Code of 1978, as amended. On
October 3, 2001, the Pennsylvania Insurance Commissioner removed Reliance from
rehabilitation and placed it into liquidation.

Claims have been asserted and/or brought against the Company and its
affiliates related to alleged acts or omissions occurring during the Reliance
Coverage period. It is possible, depending on the outcome of possible claims
made with various state insurance guaranty funds, that the Company will have no,
or insufficient, insurance funds available to pay any potential losses. There
are uncertainties relating to the Company's ultimate liability, if any, for
damages arising during the Reliance Coverage Period, the availability of the
insurance coverage, and possible recovery for state insurance guaranty funds.

In June 2002, the Company settled one such claim that was pending in
Jackson County, Texas. The full amount of the settlement was paid by insurance
proceeds; however, as part of the settlement, the Company agreed to reimburse
the Texas Property and Casualty Insurance Guaranty Association an amount ranging
from $0.6 to $2.5 million depending on future circumstances. The Company
estimated its exposure at approximately $1.0 million for the potential
reimbursement to the Texas Property and Casualty Insurance Guaranty Association
for costs associated with the settlement of this case and for unpaid insurance
claims and other costs for which coverage may not be available due to the
pending liquidation of Reliance. The Company believes accruals of approximately
$1.0 million as of December 31, 2003, are adequate to provide for its exposures.
The final resolution of these exposures could be substantially different from
the amount recorded.

DESIGN AND BUILD CONTRACT RISK

The Company participates in design and build construction operations,
usually as a general contractor. Virtually all design and construction work is
performed by unaffiliated subcontractors. As a consequence, the Company is
dependent upon the continued availability of and satisfactory performance by
these subcontractors for the design and construction of its facilities. There is
no assurance that there will be sufficient availability of and satisfactory
performance by these unaffiliated subcontractors. In addition, inadequate
subcontractor resources and unsatisfactory performance by these subcontractors
could have a material adverse effect on the Company's business, financial
condition and results of operation. Further, as the general contractor, the
Company is legally responsible for the performance of its contracts and, if such
contracts are under-performed or nonperformed by its subcontractors, the Company
could be financially responsible. Although the Company's contracts with its
subcontractors provide for indemnification if its subcontractors do not
satisfactorily perform their contract, there can be no assurance that such
indemnification would cover the Company's financial losses in attempting to
fulfill the contractual obligations.

OTHER

During 2003, the Company entered into a settlement agreement with one of
its customers related to certain outstanding issues, including, among other
things, equipment and building acceptance and warranty obligations. These
obligations were assumed by the

59

Company in connection with the Bio Gro acquisition, which closed in August 2000.
These obligations were included as a liability in the opening balance sheet
recorded by the Company for the Bio Gro acquisition. Under the agreement, the
customer agreed to pay approximately $0.7 million for amounts due the Company,
while the Company agreed to pay the customer approximately $1.4 million in
exchange for the settlement of the outstanding issues, including termination of
future warranty obligations. In connection with the agreement, the Company
reduced its liabilities for these obligations by approximately $2.0 million.
This amount was recorded as a reduction of cost of sales in the accompanying
condensed consolidated statements of operations in 2003.

There are various other lawsuits and claims pending against the Company
that have arisen in the normal course of business and relate mainly to matters
of environmental, personal injury and property damage. The outcome of these
matters is not presently determinable but, in the opinion of the Company's
management, the ultimate resolution of these matters will not have a material
adverse effect on the consolidated financial condition, results of operations or
cash flows of the Company.

As of March 26, 2004, Synagro has issued performance bonds of
approximately $117 million and other guarantees. Such financial instruments are
given in the ordinary course of business. Synagro insures the majority of its
contractual obligations through performance bonds.

SELF-INSURANCE

The Company is substantially self-insured for worker's compensation,
employer's liability, auto liability, general liability and employee group
health claims in view of the relatively high per-incident deductibles the
Company absorbs under its insurance arrangements for these risks. Losses up to
deductible amounts are estimated and accrued based upon known facts, historical
trends, industry averages, and actuarial assumptions regarding future claims
development and claims incurred but not reported.

(10) OTHER COMPREHENSIVE LOSS

The Company's accumulated comprehensive loss for the twelve months ended
December 31, 2003 and 2002, is summarized as follows:

YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
---- ---- ----
(IN THOUSANDS)
(UNAUDITED)

Cumulative effect of change in accounting for
derivatives ...................................... $ (2,058) $ (2,058) $ (2,058)
Change in fair value of derivatives ................. (2,201) (2,201) (2,201)
Reclassification adjustment to earnings ............. 2,159 1,346 533
Tax benefit of changes in fair value ................ 798 1,107 1,416
------------ ----------- -----------
$ (1,302) $ (1,806) $ (2,310)
============ =========== ===========

(11) STOCKHOLDERS' EQUITY

PREFERRED STOCK

The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock, which may be issued in one or more series or classes by the Board of
Directors of the Company. Each such series or class shall have such powers,
preferences, rights and restrictions as determined by resolution of the Board of
Directors. Series A Junior Participating Preferred Stock will be issued upon
exercise of the Stockholder Rights described below.

SERIES D REDEEMABLE PREFERRED STOCK

The Company has authorized 32,000 shares of Series D Preferred Stock, par
value $.002 per share. In 2000, the Company issued a total of 25,033.601 shares
of the Series D Preferred Stock to GTCR Fund VII, L.P. and its affiliates, which
is convertible by the holders into a number of shares of the Company's common
stock computed by dividing (i) the sum of (a) the number of shares to be
converted multiplied by the liquidation value and (b) the amount of accrued and
unpaid dividends by (ii) the conversion price then in effect. The initial
conversion price is $2.50 per share provided that in order to prevent dilution,
the conversion price may be adjusted. The Series D Preferred Stock is senior to
the Company's common stock or any other of its equity securities. The
liquidation value of each share of Series D Preferred Stock is $1,000 per share.
Dividends on each share of Series D Preferred Stock accrue daily at the

60

rate of eight percent per annum on the aggregate liquidation value and may be
paid in cash or accrued, at the Company's option. Upon conversion of the Series
D Preferred Stock by the holders, the holders may elect to receive the accrued
and unpaid dividends in shares of the Company's common stock at the conversion
price. The Series D Preferred Stock is entitled to one vote per share. Shares of
Series D Preferred Stock are subject to mandatory redemption by the Company on
January 26, 2010, at a price per share equal to the liquidation value plus
accrued and unpaid dividends. If the outstanding shares of Series D Preferred
Stock excluding accrued dividends were converted at December 31, 2003, they
would represent 10,013,441 shares of common stock.

SERIES E REDEEMABLE PREFERRED STOCK

The Company has authorized 55,000 shares of Series E Preferred Stock, par
value $.002 per share. GTCR Fund VII, L.P. and its affiliates own 37,504.229
shares of Series E Preferred Stock and certain affiliates of The TCW Group, Inc.
own 7,254.462 shares. The Series E Preferred Stock is convertible by the holders
into a number of shares of the Company's common stock computed by dividing (i)
the sum of (a) the number of shares to be converted multiplied by the
liquidation value and (b) the amount of accrued and unpaid dividends by (ii) the
conversion price then in effect. The initial conversion price is $2.50 per share
provided that in order to prevent dilution, the conversion price may be
adjusted. The Series E Preferred Stock is senior to the Company's common stock
and any other of its equity securities. The liquidation value of each share of
Series E Preferred Stock is $1,000 per share. Dividends on each share of Series
E Preferred Stock accrue daily at the rate of eight percent per annum on the
aggregate liquidation value and may be paid in cash or accrued, at the Company's
option. Upon conversion of the Series E Preferred Stock by the holders, the
holders may elect to receive the accrued and unpaid dividends in shares of the
Company's common stock at the conversion price. The Series E Preferred Stock is
entitled to one vote per share. Shares of Series E Preferred Stock are subject
to mandatory redemption by the Company on January 26, 2010, at a price per share
equal to the liquidation value plus accrued and unpaid dividends. If the
outstanding shares of Series E Preferred Stock excluding accrued dividends were
converted at December 31, 2003, they would represent 17,903,475 shares of common
stock.

The future issuance of Series D and Series E Preferred Stock may result in
noncash beneficial conversions valued in future periods recognized as preferred
stock dividends if the market value of the Company's common stock is higher than
the conversion price at date of issuance.

EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing net income
applicable to common stock by the weighted average number of common shares
outstanding for the period. For periods in which the Company has reported either
an extraordinary item or a cumulative effect of an accounting change, the
Company uses income from continuing operations as the "control number" in
determining whether potential common shares are dilutive or antidilutive. That
is, the same number of potential common shares used in computing the diluted
per-share amount for income from continuing operations has been used in
computing all other reported diluted per-share amounts even if those amounts
will be antidilutive to their respective basic per-share amounts. Diluted EPS is
computed by dividing net income before preferred stock dividends by the total of
the weighted average number of common shares outstanding for the period, the
weighted average number of shares of common stock that would be issued assuming
conversion of the Company's preferred stock, and other common stock equivalents
for options and warrants outstanding determined using the treasury stock method.

The following table summarizes the net income and weighted average shares
to reconcile basic EPS and diluted EPS for the fiscal years 2003, 2002, and
2001 (in thousands except share and per share data):

61

YEAR ENDED DECEMBER 31,
------------------------------------------
2003 2002 2001
------------ ----------- ------------
(UNAUDITED)

Net income before cumulative effect of change in accounting for
derivatives and asset retirement obligations and preferred stock
dividends ............................................................. $ 7,754 $ 11,064 $ 19,664
Cumulative effect of change in accounting for asset retirement
obligations ........................................................... 476 -- --
Cumulative effect of change in accounting for derivatives ................ -- -- 1,861
------------ ----------- ------------
Net income before preferred stock dividends .............................. 7,278 11,064 17,803
Preferred stock dividends ................................................ 8,209 7,659 7,248
------------ ----------- ------------
Net income (loss) applicable to common stock ............................. $ (931) $ 3,405 $ 10,555
============ =========== ============

Basic
Earnings (loss) per share before cumulative effect of change in
accounting for derivatives and asset retirement obligations ........ $ (0.03) $ 0.17 $ 0.64
Cumulative effect of change in accounting for asset retirement
obligations ........................................................ (0.02) -- --
Cumulative effect of change in accounting for derivatives ............. -- -- (0.10)
------------ ----------- ------------
Net income (loss) per share ........................................... $ (0.05) $ 0.17 $ 0.54
============ =========== ============

Weighted average shares outstanding for basic earnings per
share calculation ..................................................... 19,775,821 19,627,132 19,457,389

Diluted
Earnings (loss) per share before preferred stock dividends
and cumulative effect of change in accounting for
derivatives and asset retirement obligations ....................... $ (0.03) $ 0.17 $ 0.40
Cumulative effect of change in accounting for asset retirement
obligations ........................................................ (0.02) -- --
Cumulative effect of change in accounting for derivatives ............. -- -- (0.04)
------------ ----------- ------------
Net income (loss) per share ........................................... $ (0.05) $ 0.17 $ 0.36
============ =========== ============

Weighted average shares:

Weighted average shares outstanding for basic earning per share
calculation ........................................................... 19,775,821 19,627,132 19,457,389
Effect of dilutive stock options ......................................... -- -- 10,095
Effect of convertible preferred stock under the "if converted"
method ................................................................ -- -- 30,180,610
------------ ----------- ------------
Weighted average shares outstanding for diluted earnings per share ....... 19,775,821 19,627,132 49,648,094
============ =========== ============

Basic and diluted EPS are the same for 2003 and 2002 because diluted EPS
was less dilutive than basic EPS. Accordingly, 35,494,147 and 32,899,330 shares
representing common stock equivalents have been excluded from the diluted
earnings per share calculations for 2003 and 2002, respectively.

STOCKHOLDERS' RIGHTS PLAN

In December 1996, the Company adopted a stockholders' rights plan (the
"Rights Plan"). The Rights Plan provides for a dividend distribution of one
preferred stock purchase right ("Right") for each outstanding share of the
Company's common stock, to stockholders of record at the close of business on
January 10, 1997. The Rights Plan is designed to deter coercive takeover tactics
and to prevent an acquirer from gaining control of the Company without offering
a fair price to all of the Company's stockholders. The Rights will expire on
December 31, 2006.

Each Right entitles stockholders to buy one one-thousandth of a newly
issued share of Series A Junior Participating Preferred Stock of the Company at
an exercise price of $10. The Rights are exercisable only if a person or group
acquires beneficial ownership of 15 percent or more of the Company's common
stock or commences a tender or exchange offer which, if consummated, would
result in that person or group owning 15 percent or more of the common stock of
the Company. However, the Rights will not become exercisable if common stock is
acquired pursuant to an offer for all shares which a majority of the Board of
Directors determines to be fair to and otherwise in the best interests of the
Company and its stockholders. If, following an acquisition of 15 percent or more
of the

62

Company's common stock, the Company is acquired by that person or group in a
merger or other business combination transaction, each Right would then entitle
its holder to purchase common stock of the acquiring company having a value of
twice the exercise price. The effect will be to entitle the Company stockholders
to buy stock in the acquiring company at 50 percent of its market price.

The Company may redeem the Rights at $.001 per Right at any time on or
prior to the tenth business day following the acquisition of 15 percent or more
of its common stock by a person or group or commencement of a tender offer for
such 15 percent ownership.

In connection with the issuance of the Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock to GTCR Funds VII, L.P. and its
affiliates, and TCW/Crescent Lenders, the Board of Directors waived the
application of the Rights Plan.

(12) STOCK OPTION PLANS

At December 31, 2003, the Company had outstanding stock options granted
under the 2000 Stock Option Plan (the "2000 Plan") and the Amended and Restated
1993 Stock Option Plan (the "Plan") for officers, directors and key employees of
the Company (collectively, the "Option Plans").

At December 31, 2003, there were 3,795,000 options for shares of common
stock reserved under the 2000 Plan for future grants. Effective with the
approval of the 2000 Plan, no further grants will be made under the 1993 Plan.
The exercise price of options granted shall be at least 100 percent (110 percent
for 10 percent or greater stockholders) of the fair value of Common Stock on the
date of grant. Options must be granted within ten years from the date of the
Plan and become exercisable at such times as determined by the Plan committee.
Options are exercisable for no longer than five years for certain ten percent or
greater stockholders and for no longer than ten years for others.

A summary of the Company's stock option plans as of December 31, 2003,
2002 and 2001, and changes during those years is presented below:

2000 Plan

WEIGHTED
AVERAGE
SHARES UNDER EXERCISE EXERCISE
OPTION PRICE RANGE PRICE
------------ -------------- ---------

Options outstanding at January 1, 2001 (unaudited).... 925,000 $ 2.50 $ 2.50
Granted (unaudited) .............................. 4,239,471 2.50 - 6.31 2.79
Canceled (unaudited) ............................. (729,379) 2.50 - 6.31 2.77
--------- -------------- ---------
Options outstanding at
December 31, 2001 .................................. 4,435,092 $ 2.50 - 6.31 $ 2.73
Granted .......................................... 345,000 2.50 2.50
Canceled ......................................... (218,500) 2.50 2.50
--------- -------------- ---------
Options outstanding at December 31, 2002 ............. 4,561,592 $ 2.50 - 6.31 $ 2.73
Granted .......................................... 127,500 2.50 - 2.61 2.52
Canceled ......................................... (45,000) 2.50 2.50
--------- -------------- ---------
Options outstanding at December 31, 2003 ............. 4,644,092 $ 2.50 - 6.31 $ 2.72
========= ============== =========
Exercisable at December 31, 2003 ..................... 1,923,637 $ 2.50 - 6.31 $ 2.71
========= ============== =========

63

1993 Plan

WEIGHTED
AVERAGE
SHARES UNDER EXERCISE EXERCISE
OPTION PRICE RANGE PRICE
------------ ------------------ -----------

Options outstanding at January 1, 2001 (unaudited) .. 1,310,273 $ 2.00 - 8.25 $ 3.42
Exercised (unaudited) ........................... (41,000) 2.00 2.00
Canceled (unaudited) ............................ (173,600) $ 2.75 - 8.25 $ 3.48
------------ ------------------ -----------
Options outstanding at December 31, 2001 ............ 1,095,673 $ 2.00 - 6.31 $ 3.47
Canceled/expired ................................ (35,000) 3.00 - 3.63 3.18
------------ ------------------ -----------
Options outstanding at December 31, 2002 ............ 1,060,673 $ 2.00 - 6.31 $ 3.48
Canceled/expired ................................ (120,000) 2.75 - 4.00 3.48
------------ ------------------ -----------
Options outstanding at December 31, 2003 ............ 940,673 $ 2.00 - 6.31 $ 3.48
============ ================== ===========
Exercisable at December 31, 2003 .................... 940,673 $ 2.00 - 6.31 $ 3.48
============ ================== ===========

OTHER OPTIONS

In addition to options issuable under the above plans, the Company has
other options outstanding to employees and directors of the Company which were
issued at exercise prices equal to the fair market value at the grant date of
the options, and are summarized as follows:

WEIGHTED
AVERAGE
SHARES UNDER EXERCISE EXERCISE
OPTION PRICE RANGE PRICE
------------ ------------ --------

Options outstanding at January 1, 2001 (unaudited) .. 2,470,595 $2.00 - 6.94 $ 3.71
Canceled (unaudited) ............................ (493,641) 2.00 - 6.31 4.98
----------- ------------ ------
Options outstanding at December 31, 2001 ............ 1,976,954 $2.00 - 6.94 $ 3.40
Granted ......................................... 1,000,000 2.50 2.50
----------- ------------ ------
Options outstanding at December 31, 2002 ............ 2,976,954 $2.00 - 6.94 $ 3.10
Granted ......................................... 150,000 2.50 2.50
----------- ------------ ------
Options outstanding at December 31, 2003 ............ 3,126,954 $2.00 - 6.94 $ 3.07
=========== ============ ======
Exercisable at December 31, 2003 .................... 2,176,954 $2.00 - 6.94 $ 2.31
=========== =========== ======

The following ranges of options were outstanding as of December 31, 2003:

WEIGHTED AVERAGE
OUTSTANDING SHARES EXERCISE PRICE WEIGHTED AVERAGE CONTRACTUAL LIFE
UNDER OPTION RANGE EXERCISE PRICE (IN YEARS) EXERCISABLE
------------------ -------------- ---------------- ---------------- -----------

6,453,970 ............... $2.00 - 2.99 $ 2.50 7.04 2,950,770
1,528,326 ............... 3.00 - 3.99 3.24 4.79 1,528,326
180,091 ............... 4.00 - 5.99 4.76 6.66 147,836
549,332 ............... 6.00 - 6.94 6.39 6.66 414,332

(13) REORGANIZATION COSTS

In response to lower-than-expected operating results, management performed
a review of its overhead structure and reorganized certain administrative
functions. As a result of these decisions, we recorded $1.2 million of severance
costs connected with the termination of 18 employees and consultants. These
costs are reported as reorganization costs in the accompanying 2003 consolidated
statement of operations. Approximately $0.7 million was recorded in accrued
expenses at December 31, 2003, in the accompanying 2003 consolidated balance
sheet related to the 2003 reorganization.

During 2002, the Company reorganized by reducing the number of its
operating regions, which resulted in approximately $0.7 million of severance
costs in connection with the termination of 24 employees and approximately $0.3
million of terminated

64

office lease arrangements. The total costs incurred of approximately $0.9
million have been reported as reorganization costs in the accompanying 2002
consolidated statement of operations. All costs related to the 2002
reorganization were paid as of December 31, 2003.

(14) SPECIAL CREDITS, NET (UNAUDITED)

In 2001, the Company recognized $5.0 million of net special credits, which
includes the $6.1 million special credit from litigation settlement related to
claims between the Company and Azurix Corp. arising from financing and merger
discussions between the companies that were terminated in October 1999 and
settled in September 2001, partially offset by the $1.1 million of net special
charges recognized in December 2001. The $1.1 million of net special charges
includes a $2.2 million charge for the Company's estimated net exposure for
unpaid insurance claims and other costs related to the Company's 1998 and 1999
policy periods for which coverage may not be available due to the pending
liquidation status of the Company's previous insurance underwriter, Reliance
National Indemnity Company, partially offset by a $1.1 million special credit
resulting from the settlement of litigation as such matter was settled in an
amount favorable to prior estimates.

(15) EMPLOYEE BENEFIT PLANS

The Company sponsors a defined contribution retirement plan for full-time
and some part-time employees. The plan covers employees at all of the Company's
operating locations. The defined contribution plan provides for contributions
ranging from 1 percent to 15 percent of covered employees' salaries or wages.
The Company may make a matching contribution as a percentage of the employee
contribution. For 2003, 2002 and 2001, the matching contributions totaled
approximately $1.1 million, $1.1 million and $1.0 million, respectively.

(16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Quarterly financial information for the years ended December 31, 2003 and
2002, is summarized as follows (in thousands, except per share data).

QUARTER ENDED QUARTER ENDED
-------------------------------------------- -----------------------------------------
(in thousands, except for per share data) (in thousands, except for per share data)
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
2003 2003 2003 2003 2002 2002 2002 2002
-------- ------- ------- -------- -------- -------- ------- -------

Revenues ...................... $ 63,229 $75,641 $79,634 $ 80,049 $ 56,817 $ 69,499 $74,712 $71,601
Gross profit .................. 11,842 20,140 18,660 13,460 13,559 19,499 19,426 18,264
Operating income .............. 5,537 14,214 12,616 4,045 7,763 13,861 13,328 11,849
Net income (loss) applicable to
common stock ................ $ (2,662) $ 2,961 $ 2,230 $ (3,460) $ (412) $ (303) $ 2,537 $ 1,584
Earnings (loss) per share
Basic ....................... $ (0.13) $ 0.15 $ 0.11 $ (0.17) $ (0.02) $ (0.02) $ 0.13 $ 0.08
Diluted ..................... $ (0.13) $ 0.09 $ 0.08 $ (0.17) $ (0.02) $ (0.02) $ 0.08 $ 0.07

The sum of the individual quarterly earnings per share amounts do not
agree with year-to-date earnings per share as each quarter's computation is
based on the weighted average number of shares outstanding during the quarter,
the weighted average stock price during the quarter, and the dilutive effects of
the redeemable preferred stock and stock options, if applicable, in each
quarter.

(17) RELATED PARTY

Proceeds from the sale of $150 million aggregate principal amount of Notes
were used to repay and refinance existing indebtedness under the Company's
previous credit facility as of April 17, 2002, and the Company's subordinated
debt. Affiliates of GTCR Golder Rauner LLC and The TCW Group, Inc., the
Company's preferred stockholders, were participating lenders under the
subordinated debt, and as such, they received the portion of the proceeds from
the sale of the Notes that were used to retire all amounts outstanding under the
subordinated debt, approximately $26.4 million each.

As part of the purchase price of Earthwise, the Company entered into a
$1.5 million note agreement with the former owners who stayed on as employees.
The note is payable in three equal, annual installments beginning October 2003,
and has an interest rate of five percent paid quarterly. The first payment was
made on September 30, 2003.

65

In May 2003, the Company incurred indebtedness of $0.5 million to the
former owners of Aspen in connection with the Aspen acquisition. If certain
post-closing conditions are met, as defined in the purchase agreement, the note
to the former owners is payable monthly at an annual interest rate of five
percent. The Company currently believes the post-closing conditions will be met.

We maintain two leases with an affiliate of one of our stockholders. The
first lease has an initial term through July 31, 2004, with an option to renew
for an additional five-year period. Rental payments made under this lease in
2003 totaled approximately $0.1 million. The second lease has an initial term
through December 31, 2013. Rental payments made under the second lease in 2003
totaled approximately $0.1 million.

(18) CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

As discussed in Note 6, as of December 31, 2003, all of the Company's
subsidiaries, except the subsidiaries formed to own and operate the Sacramento
dryer project, Synagro Organic Fertilizer Company of Sacramento, Inc. and
Sacramento Project Finance, Inc. (the "Non-Guarantor Subsidiaries"), are
Guarantors of the Notes. Each of the Guarantor Subsidiaries is ultimately wholly
owned by the parent company and the guarantees are unconditional and joint and
several. Additionally, the Company is not a Guarantor for the debt of the
Non-Guarantor Subsidiaries. Accordingly, the following condensed consolidating
balance sheet as of December 31, 2003, and December 31, 2002, has been provided.
As the Non-Guarantor Subsidiaries had no operations and cash flows from December
31, 2002, through December 31, 2003, because the construction of the facility is
still in progress, no condensed consolidating statements of operations or cash
flows have been provided.

66

CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)

NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------

ASSETS

Current Assets:
Cash and cash equivalents .............................. $ 91 $ 64 $ 51 $ -- $ 206
Restricted cash ........................................ -- 1,410 -- -- 1,410
Accounts receivable, net ............................... -- 59,581 -- -- 59,581
Note receivable, current portion ....................... -- 342 -- -- 342
Prepaid expenses and other current assets .............. -- 10,840 -- -- 10,840
--------- -------- ------- -------- ---------
Total current assets ........................... 91 72,237 51 -- 72,379

Property, machinery & equipment, net ..................... -- 207,833 5,864 -- 213,697

Other Assets:
Goodwill ............................................... -- 172,398 -- -- 172,398
Investments in subsidiaries ............................ 76,551 -- -- (76,551) --
Restricted cash - construction fund .................... -- -- 12,184 -- 12,184
Restricted cash - debt service fund .................... -- 5,561 1,714 -- 7,275
Other, net ............................................. 6,217 4,902 2,972 -- 14,091
--------- -------- ------- -------- ---------
Total assets ................................... $ 82,859 $462,931 $22,785 $(76,551) $ 492,024
========= ======== ======= ======== =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Current portion of long-term debt ...................... $ 955 $ -- $ -- $ -- $ 955
Current portion of nonrecourse project revenue bonds ... -- 2,570 -- -- 2,570
Current portion of capital lease obligations ........... -- 2,678 -- -- 2,678
Accounts payable and accrued expenses .................. -- 46,915 564 -- 47,479
--------- -------- ------- -------- ---------
Total current liabilities ...................... 955 52,163 564 -- 53,682

Long-Term Debt:
Long-term debt obligations, net ........................ 194,084 -- -- -- 194,084
Nonrecourse project revenue bonds, net ................. -- 41,365 20,936 -- 62,301
Intercompany ........................................... (267,433) 267,433 -- -- --
Capital lease obligations, net ......................... -- 12,748 -- -- 12,748
--------- -------- ------- -------- ---------
Total long-term debt ................................ (73,349) 321,546 20,936 -- 269,133

Other long-term liabilities .............................. 3,580 13,956 -- -- 17,536
--------- -------- ------- -------- ---------

Total liabilities .............................. (68,814) 387,665 21,500 -- 340,351

Commitments and Contingencies
Redeemable Preferred Stock,
69,792.29 shares issued and outstanding,
redeemable at $1,000 per share ......................... 86,299 -- -- -- 86,299
Stockholders' Equity:
Capital ................................................ 82,153 37,804 1,285 (39,089) 82,153
Accumulated deficit .................................... (15,477) 37,462 -- (37,462) (15,477)
Accumulated other comprehensive loss ................... (1,302) -- -- -- (1,302)
--------- -------- ------- -------- ---------
Total stockholders' equity ..................... 65,374 75,266 1,285 (76,551) 65,374
--------- -------- ------- -------- ---------
Total liabilities and stockholders' equity ............... $ 82,859 $462,931 $22,785 $(76,551) $ 492,024
========= ======== ======= ======== =========

67

CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
(RESTATED)

NON-
GUARANTOR GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------

ASSETS

Current Assets:
Cash and cash equivalents .............................. $ 81 $ 158 $ -- $ -- $ 239
Restricted cash ........................................ -- 1,696 -- -- 1,696
Accounts receivable, net ............................... -- 54,814 -- -- 54,814
Note receivable, current portion ....................... -- 554 -- -- 554
Prepaid expenses and other current assets .............. -- 15,399 -- -- 15,399
--------- -------- ------- -------- ---------
Total current assets ........................... 81 72,621 -- -- 72,702

Property, machinery & equipment, net ..................... -- 213,331 -- -- 213,331

Other Assets:
Goodwill ............................................... -- 168,464 -- -- 168,464
Investments in subsidiaries ............................ 77,482 -- -- (77,482) --
Restricted cash - construction fund .................... -- -- 17,733 -- 17,733
Restricted cash - debt service fund .................... -- 5,778 1,713 -- 7,491
Other, net ............................................. 6,371 5,410 1,965 -- 13,746
--------- -------- ------- -------- ---------
Total assets ................................... $ 83,934 $465,604 $21,411 $(77,482) $ 493,467
========= ======== ======= ======== =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Current portion of long-term debt ...................... $ 1,111 $ -- $ -- $ -- $ 1,111
Current portion of nonrecourse project revenue bonds ... -- 2,430 -- -- 2,430
Current portion of capital lease obligations ........... -- 1,280 -- -- 1,280
Accounts payable and accrued expenses .................. -- 48,812 -- -- 48,812
--------- -------- ------- -------- ---------
Total current liabilities ...................... 1,111 52,522 -- -- 53,633

Long-Term Debt:
Long-term debt obligations, net ........................ 209,225 1,526 -- -- 210,751
Nonrecourse project revenue bonds, net ................. -- 43,935 20,906 -- 64,841
Intercompany ........................................... (273,729) 273,729 -- -- --
Capital lease obligations, net ......................... -- 7,938 -- -- 7,938
--------- -------- ------- -------- ---------
Total long-term debt ................................ (64,504) 327,128 20,906 -- 283,530

Other long-term liabilities .............................. 3,436 8,977 -- -- 12,413
--------- -------- ------- -------- ---------

Total liabilities .............................. (59,957) 388,627 20,906 -- 349,576

Commitments and Contingencies
Redeemable Preferred Stock,
69,792.29 shares issued and outstanding,
redeemable at $1,000 per share ......................... 78,090 -- -- -- 78,090
Stockholders' Equity:
Capital ................................................ 90,362 38,585 505 (39,090) 90,362
Accumulated deficit .................................... (22,755) 38,392 -- (38,392) (22,755)
Accumulated other comprehensive loss ................... (1,806) -- -- -- (1,806)
--------- -------- ------- -------- ---------
Total stockholders' equity ..................... 65,801 76,977 505 (77,482) 65,801
--------- -------- ------- -------- ---------
Total liabilities and stockholders' equity ............... $ 83,934 $465,604 $21,411 $(77,482) $ 493,467
========= ======== ======= ======== =========

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

The Company filed a Form 8-K on August 7, 2002, confirming the dismissal
of Arthur Andersen LLP as the Company's independent auditor and appointing
PricewaterhouseCoopers LLP as the Company's independent auditor.

ITEM 9A. CONTROLS AND PROCEDURES

As of the end of the period covered by this Form 10-K, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of its disclosure controls and procedures (as
defined in rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of

68

1934, as amended (the "Exchange Act)). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to the Company (including our consolidated
subsidiaries) that is required to be included in our periodic filings under the
Exchange Act.

PART III

In accordance with paragraph (3) of General Instruction G to Form 10-K,
Part III of this Report is omitted because the Company has filed with the
Securities and Exchange Commission, not later than 120 days after December 31,
2003, a definitive proxy statement pursuant to Regulation 14A involving the
election of directors. Reference is made to the sections of such proxy statement
entitled "Other Information - Principal Stockholders," "Other Information -
Executive Compensation," "Election of Directors - Management Stockholdings,"
"Principal Accountant Fees," and "Other Information - Certain Transactions,"
which sections and subsections of such proxy statement are incorporated herein.

69

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Financial Statements and Exhibits:

1. Financial Statements:

PAGE
----

Report of Independent Auditors - PricewaterhouseCoopers LLP .............. 37
Consolidated Balance Sheets as of December 31, 2003 and 2002 (restated) .. 38
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001 (unaudited) .......................... 39
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2003, 2002 and 2001 (restated and unaudited) ............. 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 (unaudited) .......................... 41
Notes to Consolidated Financial Statements ............................... 43

2. Financial Schedules:

All financial statement schedules are omitted for the reason that they are
not required or are not applicable, or the required information is shown in the
financial statements or the notes thereto.

3. Exhibits:

3.1 -- Restated Certificate of Incorporation of Synagro
Technologies, Inc. (the "Company") dated August 16, 1996
(Incorporated by reference to Exhibit 3.1 to the
Company's Post-Effective Amendment No. 1 to Registration
Statement No. 33-95028, dated October 25, 1996).

3.2 -- Amended and Restated Bylaws of the Company dated
effective January 27, 2000 (Incorporated by reference to
Exhibit No. 3.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 2001).

4.1 -- Specimen Common Stock Certificate of the Company
(Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 10, dated
December 29, 1992).

4.2 -- Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock of Synagro
Technologies, Inc. (Incorporated by reference to Exhibit
2.5 to the Company's Current Report on Form 8-K, dated
February 17, 2000).

4.3 -- Certificate of Designations, Preferences and Rights of
Series E Convertible Preferred Stock of Synagro
Technologies, Inc. (Incorporated by reference to Exhibit
2.3 to the Company's Current Report on Form 8-K, dated
June 30, 2000).

4.4 -- Amended and Restated Warrant Agreement, dated August 14,
2000, by and between Synagro Technologies, Inc. and GTCR
Capital Partners, L.P. (Incorporated by reference to
Exhibit 2.6 to the Company's Current Report on Form 8-K,
dated August 28, 2000).

4.5 -- TCW/Crescent Warrant Agreement dated August 14, 2000, by
and among Synagro Technologies, Inc. and TCW/Crescent
Mezzanine partners II, L.P., TCW/Crescent Mezzanine
Trust II, TCW Leveraged Income Trust, L.P., TCW
Leveraged Income Trust II,

70

L.P., and TCW Leveraged Income Trust IV, L.P.
(Incorporated by reference to Exhibit 2.5 to the
Company's Current Report on Form 8-K, dated August 28,
2000).

4.6 -- Form of Stock Purchase Warrant (Incorporated by
reference to Exhibit 2.7 to the Company's Current Report
on Form 8-K, dated August 28, 2000).

4.7 -- Amended and Restated Registration Agreement dated August
14, 2000, by and between Synagro Technologies, Inc.,
GTCR Fund VII. L.P., GTCR Co-Invest, L.P., GTCR Capital
Partners, L.P., TCW/Crescent Mezzanine Partners II,
L.P., TCW/Crescent Mezzanine Trust II, TCW Leveraged
Income Trust, L.P., TCW Leveraged Income Trust II, L.P.,
and TCW Leverage Income Trust IV, L.P. (Incorporated by
reference to Exhibit 2.8 to the Company's Current Report
on Form 8-K, dated August 28, 2000).

4.8 -- Stockholders Agreement dated August 14, 2000, by and
between Synagro Technologies Inc., GTCR Fund VII, L.P.,
GTCR Co-Invest, L.P., GTCR Capital Partners, L.P.,
TCW/Crescent Mezzanine Partners II, L.P., TCW/Crescent
Mezzanine Trust II, TCW Leveraged Income Trust, L.P.,
TCW Leveraged Income Trust II, L.P., and TCW Leveraged
Income Trust IV, L.P. (Incorporated by reference to
Exhibit 2.9 to the Company's Current Report on Form 8-K,
dated August 28, 2000).

4.9 -- Form of TCW/Crescent Warrant (Incorporated by reference
to Exhibit 2.10 to the Company's Current Report on Form
8-K, dated August 28, 2000).

4.10 -- Form of GTCR Warrant (Incorporated by reference to
Exhibit 2.11 to the Company's Current Report on Form
8-K, dated August 28, 2000).

10.1 -- Form of Indemnification Agreement (Incorporated by
reference to Appendix F to the Company's Proxy Statement
on Schedule 14A for Annual Meeting of Stockholders,
dated May 9, 1996).

10.2 -- Amended and Restated 1993 Stock Option Plan dated August
5, 1996 (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (No.
333-64999), dated September 30, 1998).

10.3 -- Stock Purchase Agreement dated March 31, 2000, by and
between Synagro Technologies, Inc. and Compost America
Holding Company, Inc. (Incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K,
dated June 30, 2000).

10.4 -- Earn Out Agreement dated June 15, 2000, by and among
Synagro Technologies, Inc. and Compost America Holding
Company, Inc. (Incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K, dated June
30, 2000).

10.5 -- Purchase Agreement dated January 27, 2000, by and
between Synagro Technologies, Inc. and GTCR Fund VII,
L.P. (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K, dated February 17,
2000).

10.6 -- Professional Services Agreement, dated January 27, 2000,
by and between Synagro Technologies, Inc. and GTCR Fund
VII, L.P. (Incorporated by reference to Exhibit 2.7 to
the Company's Current Report on Form 8-K, dated February
17, 2000).

10.7 -- Amended and Restated Senior Subordinated Loan Agreement,
dated August 14, 2000, by and among Synagro
Technologies, Inc., certain subsidiary guarantors, GTCR
Capital Partners, L.P. and TCW/ Crescent Mezzanine
Partners II, L.P., TCW/Crescent Mezzanine Trust II, TCW
Leveraged Income Trust, L.P., TCW Leveraged

71

Income Trust II, L.P., and TCW Leveraged Income Trust
IV, L.P. (Incorporated by reference to Exhibit 2.2 to
the Company's Current Report on Form 8-K, dated February
17, 2000).

10.8 -- Stock Purchase Agreement dated April 28, 2000, by and
among Synagro Technologies, Inc., Resco Holdings, Inc.,
Waste Management Holdings, Inc., and Waste Management,
Inc. (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K, dated August 28,
2000).

10.9 -- Amended and Restated Monitoring Agreement dated August
14, 2000, by and between Synagro Technologies, Inc.,
GTCR Golder Rauner, L.L.C., and TCW/Crescent Mezzanine
Partners II, L.P., TCW/Crescent Mezzanine Trust II, TCW
Leveraged Income Trust, L.P., TCW Leveraged Income Trust
II, L.P., and TCW Leveraged Income Trust IV, L.P.
(Incorporated by reference to Exhibit 2.12 to the
Company's Current Report on Form 8-K, dated August 28,
2000).

10.10 -- Employment Agreement dated February 19, 1999, by and
between Synagro Technologies, Inc. and Ross M. Patten
(Incorporated by reference to Exhibit 10.20 to the
Company's Current Report on Form 10-K/A, dated April 30,
2001); Agreement Concerning Employment Rights dated
January 27, 2000, by and between Synagro Technologies,
Inc. and Ross M. Patten (Incorporated by reference to
Exhibit 2.8 to the Company's Current Report on Form 8-K,
dated February 17, 2000).(1)

10.11 -- Employment Agreement dated February 19, 1999, by and
between Synagro Technologies, Inc. and Mark A. Rome
(Incorporated by reference to Exhibit 10.21 to the
Company's Current Report on Form 10-K/A, dated April 30,
2001); Agreement Concerning Employment Rights dated
January 27, 2000, by and between Synagro Technologies,
Inc. and Mark A. Rome (Incorporated by reference to
Exhibit 2.9 to the Company's Current Report on Form 8-K,
dated February 17, 2000).(1)

10.12 -- Employment Agreement dated February 19, 1999, by and
between Synagro Technologies, Inc. and Alvin L. Thomas
II (Incorporated by reference to Exhibit 10.22 to the
Company's Current Report on Form 10-K/A, dated April 30,
2001); Agreement Concerning Employment Rights dated
January 27, 2000, by and between Synagro Technologies,
Inc. and Alvin L. Thomas, II (Incorporated by reference
to Exhibit 2.10 to the Company's Current Report on Form
8-K, dated February 17, 2000).(1)

10.13 -- Employment Agreement dated May 10, 1999, by and between
Synagro Technologies, Inc. and J. Paul Withrow
(Incorporated by reference to Exhibit 2.11 to the
Company's Current Report on Form 8-K, dated February 17,
2000); Agreement Concerning Employment Rights dated
January 27, 2000, by and between Synagro Technologies,
Inc. and J. Paul Withrow (Incorporated by reference to
Exhibit 2.12 to the Company's Current Report on Form
8-K, dated February 17, 2000).(1)

10.14 -- Amendment No. 2 to Agreement Concerning Employment
Rights dated March 1, 2001, by and between Synagro
Technologies, Inc. and Ross M. Patten (Incorporated by
reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001).(1)

10.15 -- Amendment No. 2 to Agreement Concerning Employment
Rights dated March 1, 2001, by and between Synagro
Technologies, Inc. and Mark A. Rome (Incorporated by
reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001).(1)

10.16 -- Amendment No. 2 to Agreement Concerning Employment
Rights

72

dated March 1, 2001, by and between Synagro
Technologies, Inc. and Alvin L. Thomas, II (Incorporated
by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001).(1)

10.17 -- Amendment No. 2 to Agreement Concerning Employment
Rights dated March 1, 2001, by and between Synagro
Technologies, Inc. and J. Paul Withrow (Incorporated by
reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001).(1)

10.18 -- 2000 Stock Option Plan dated October 31, 2000
(Incorporated by reference to Exhibit A to the Company's
Proxy Statement on Schedule 14A for Annual Meeting of
Stockholders, dated September 28, 2000).(1)

10.19 -- Employment Agreement dated March 1, 2002, by and between
Synagro Technologies, Inc. and Robert Boucher
(Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
2001).(1)

10.20 -- Amendment No. 1 to Employment Agreement dated effective
February 1, 2002, by and between Synagro Technologies,
Inc. and Randall S. Tuttle (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year
ended December 31, 2001).(1)

10.21 -- Third Amended and Restated Credit Agreement dated May 8,
2002, among Synagro Technologies, Inc., various
financial institutions, and Bank of America, N.A.
(Incorporated by reference to the Company's Form 10-Q
for the period ended March 31, 2002).

10.22* -- Amendment No. 3 to Employment Agreement dated effective
December 30, 2003, by and between Synagro Technologies,
Inc. and Ross M. Patten. (1)

10.23* -- General Release dated effective December 30, 2003,
executed and delivered by Ross M. Patten in favor of
Synagro Technologies, Inc. (1)

21.1* -- Subsidiaries of Synagro Technologies, Inc.

23.1* -- Consent of Independent Accountants

31.1* -- Section 302 Certification of Chief Executive Officer

31.2* -- Section 302 Certification of Chief Financial Officer

32.1* -- Section 906 Certification of Chief Executive Officer

32.2* -- Section 906 Certification of Chief Financial Officer

- ----------

* Filed with this Form 10-K.

(1) Management contract or compensatory plan or agreement.

(b) Reports on Form 8-K:

Current report on Form 8-K filed on November 6, 2003, announcing the
Company's third quarter 2003 results.

Current report on Form 8-K filed on March 5, 2004, announcing the
Company's 2003 results.

73

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

SYNAGRO TECHNOLOGIES, INC.
(Registrant)

By: /s/ ROBERT C. BOUCHER
------------------------
Robert C. Boucher
Chief Executive Officer

Date: March 29, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ ROSS M. PATTEN Chairman of the Board March 29, 2004
- -------------------------------
Ross M. Patten

/s/ ROBERT C. BOUCHER Chief Executive Officer March 29, 2004
- -------------------------------
Robert C. Boucher (Principal Executive Officer)

/s/ J. PAUL WITHROW Chief Financial Officer March 29, 2004
- -------------------------------
J. Paul Withrow (Principal Accounting Officer)

/s/ GENE MEREDITH Director March 29, 2004
- -------------------------------
Gene Meredith

/s/ KENNETH CHUAN-KAI LEUNG Director March 29, 2004
- -------------------------------
Kenneth Chuan-kai Leung

/s/ ALFRED TYLER, 2ND Director March 29, 2004
- -------------------------------
Alfred Tyler, 2nd

/s/ DAVID A. DONNINI Director March 29, 2004
- -------------------------------
David A. Donnini

/s/ VINCENT J. HEMMER Director March 29, 2004
- -------------------------------
Vincent J. Hemmer

74

INDEX TO EXHIBITS

3.1 -- Restated Certificate of Incorporation of Synagro
Technologies, Inc. (the "Company") dated August 16, 1996
(Incorporated by reference to Exhibit 3.1 to the
Company's Post-Effective Amendment No. 1 to Registration
Statement No. 33-95028, dated October 25, 1996).

3.2 -- Amended and Restated Bylaws of the Company dated
effective January 27, 2000 (Incorporated by reference to
Exhibit No. 3.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 2001).

4.1 -- Specimen Common Stock Certificate of the Company
(Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 10, dated
December 29, 1992).

4.2 -- Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock of Synagro
Technologies, Inc. (Incorporated by reference to Exhibit
2.5 to the Company's Current Report on Form 8-K, dated
February 17, 2000).

4.3 -- Certificate of Designations, Preferences and Rights of
Series E Convertible Preferred Stock of Synagro
Technologies, Inc. (Incorporated by reference to Exhibit
2.3 to the Company's Current Report on Form 8-K, dated
June 30, 2000).

4.4 -- Amended and Restated Warrant Agreement, dated August 14,
2000, by and between Synagro Technologies, Inc. and GTCR
Capital Partners, L.P. (Incorporated by reference to
Exhibit 2.6 to the Company's Current Report on Form 8-K,
dated August 28, 2000).

4.5 -- TCW/Crescent Warrant Agreement dated August 14, 2000, by
and among Synagro Technologies, Inc. and TCW/Crescent
Mezzanine partners II, L.P., TCW/Crescent Mezzanine
Trust II, TCW Leveraged Income Trust, L.P., TCW
Leveraged Income Trust II,

L.P., and TCW Leveraged Income Trust IV, L.P.
(Incorporated by reference to Exhibit 2.5 to the
Company's Current Report on Form 8-K, dated August 28,
2000).

4.6 -- Form of Stock Purchase Warrant (Incorporated by
reference to Exhibit 2.7 to the Company's Current Report
on Form 8-K, dated August 28, 2000).

4.7 -- Amended and Restated Registration Agreement dated August
14, 2000, by and between Synagro Technologies, Inc.,
GTCR Fund VII. L.P., GTCR Co-Invest, L.P., GTCR Capital
Partners, L.P., TCW/Crescent Mezzanine Partners II,
L.P., TCW/Crescent Mezzanine Trust II, TCW Leveraged
Income Trust, L.P., TCW Leveraged Income Trust II, L.P.,
and TCW Leverage Income Trust IV, L.P. (Incorporated by
reference to Exhibit 2.8 to the Company's Current Report
on Form 8-K, dated August 28, 2000).

4.8 -- Stockholders Agreement dated August 14, 2000, by and
between Synagro Technologies Inc., GTCR Fund VII, L.P.,
GTCR Co-Invest, L.P., GTCR Capital Partners, L.P.,
TCW/Crescent Mezzanine Partners II, L.P., TCW/Crescent
Mezzanine Trust II, TCW Leveraged Income Trust, L.P.,
TCW Leveraged Income Trust II, L.P., and TCW Leveraged
Income Trust IV, L.P. (Incorporated by reference to
Exhibit 2.9 to the Company's Current Report on Form 8-K,
dated August 28, 2000).

4.9 -- Form of TCW/Crescent Warrant (Incorporated by reference
to Exhibit 2.10 to the Company's Current Report on Form
8-K, dated August 28, 2000).

4.10 -- Form of GTCR Warrant (Incorporated by reference to
Exhibit 2.11 to the Company's Current Report on Form
8-K, dated August 28, 2000).

10.1 -- Form of Indemnification Agreement (Incorporated by
reference to Appendix F to the Company's Proxy Statement
on Schedule 14A for Annual Meeting of Stockholders,
dated May 9, 1996).

10.2 -- Amended and Restated 1993 Stock Option Plan dated August
5, 1996 (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (No.
333-64999), dated September 30, 1998).

10.3 -- Stock Purchase Agreement dated March 31, 2000, by and
between Synagro Technologies, Inc. and Compost America
Holding Company, Inc. (Incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K,
dated June 30, 2000).

10.4 -- Earn Out Agreement dated June 15, 2000, by and among
Synagro Technologies, Inc. and Compost America Holding
Company, Inc. (Incorporated by reference to Exhibit 2.2
to the Company's Current Report on Form 8-K, dated June
30, 2000).

10.5 -- Purchase Agreement dated January 27, 2000, by and
between Synagro Technologies, Inc. and GTCR Fund VII,
L.P. (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K, dated February 17,
2000).

10.6 -- Professional Services Agreement, dated January 27, 2000,
by and between Synagro Technologies, Inc. and GTCR Fund
VII, L.P. (Incorporated by reference to Exhibit 2.7 to
the Company's Current Report on Form 8-K, dated February
17, 2000).

10.7 -- Amended and Restated Senior Subordinated Loan Agreement,
dated August 14, 2000, by and among Synagro
Technologies, Inc., certain subsidiary guarantors, GTCR
Capital Partners, L.P. and TCW/ Crescent Mezzanine
Partners II, L.P., TCW/Crescent Mezzanine Trust II, TCW
Leveraged Income Trust, L.P., TCW Leveraged

Income Trust II, L.P., and TCW Leveraged Income Trust
IV, L.P. (Incorporated by reference to Exhibit 2.2 to
the Company's Current Report on Form 8-K, dated February
17, 2000).

10.8 -- Stock Purchase Agreement dated April 28, 2000, by and
among Synagro Technologies, Inc., Resco Holdings, Inc.,
Waste Management Holdings, Inc., and Waste Management,
Inc. (Incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K, dated August 28,
2000).

10.9 -- Amended and Restated Monitoring Agreement dated August
14, 2000, by and between Synagro Technologies, Inc.,
GTCR Golder Rauner, L.L.C., and TCW/Crescent Mezzanine
Partners II, L.P., TCW/Crescent Mezzanine Trust II, TCW
Leveraged Income Trust, L.P., TCW Leveraged Income Trust
II, L.P., and TCW Leveraged Income Trust IV, L.P.
(Incorporated by reference to Exhibit 2.12 to the
Company's Current Report on Form 8-K, dated August 28,
2000).

10.10 -- Employment Agreement dated February 19, 1999, by and
between Synagro Technologies, Inc. and Ross M. Patten
(Incorporated by reference to Exhibit 10.20 to the
Company's Current Report on Form 10-K/A, dated April 30,
2001); Agreement Concerning Employment Rights dated
January 27, 2000, by and between Synagro Technologies,
Inc. and Ross M. Patten (Incorporated by reference to
Exhibit 2.8 to the Company's Current Report on Form 8-K,
dated February 17, 2000).(1)

10.11 -- Employment Agreement dated February 19, 1999, by and
between Synagro Technologies, Inc. and Mark A. Rome
(Incorporated by reference to Exhibit 10.21 to the
Company's Current Report on Form 10-K/A, dated April 30,
2001); Agreement Concerning Employment Rights dated
January 27, 2000, by and between Synagro Technologies,
Inc. and Mark A. Rome (Incorporated by reference to
Exhibit 2.9 to the Company's Current Report on Form 8-K,
dated February 17, 2000).(1)

10.12 -- Employment Agreement dated February 19, 1999, by and
between Synagro Technologies, Inc. and Alvin L. Thomas
II (Incorporated by reference to Exhibit 10.22 to the
Company's Current Report on Form 10-K/A, dated April 30,
2001); Agreement Concerning Employment Rights dated
January 27, 2000, by and between Synagro Technologies,
Inc. and Alvin L. Thomas, II (Incorporated by reference
to Exhibit 2.10 to the Company's Current Report on Form
8-K, dated February 17, 2000).(1)

10.13 -- Employment Agreement dated May 10, 1999, by and between
Synagro Technologies, Inc. and J. Paul Withrow
(Incorporated by reference to Exhibit 2.11 to the
Company's Current Report on Form 8-K, dated February 17,
2000); Agreement Concerning Employment Rights dated
January 27, 2000, by and between Synagro Technologies,
Inc. and J. Paul Withrow (Incorporated by reference to
Exhibit 2.12 to the Company's Current Report on Form
8-K, dated February 17, 2000).(1)

10.14 -- Amendment No. 2 to Agreement Concerning Employment
Rights dated March 1, 2001, by and between Synagro
Technologies, Inc. and Ross M. Patten (Incorporated by
reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001).(1)

10.15 -- Amendment No. 2 to Agreement Concerning Employment
Rights dated March 1, 2001, by and between Synagro
Technologies, Inc. and Mark A. Rome (Incorporated by
reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001).(1)

10.16 -- Amendment No. 2 to Agreement Concerning Employment
Rights

dated March 1, 2001, by and between Synagro
Technologies, Inc. and Alvin L. Thomas, II (Incorporated
by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001).(1)

10.17 -- Amendment No. 2 to Agreement Concerning Employment
Rights dated March 1, 2001, by and between Synagro
Technologies, Inc. and J. Paul Withrow (Incorporated by
reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001).(1)

10.18 -- 2000 Stock Option Plan dated October 31, 2000
(Incorporated by reference to Exhibit A to the Company's
Proxy Statement on Schedule 14A for Annual Meeting of
Stockholders, dated September 28, 2000).(1)

10.19 -- Employment Agreement dated March 1, 2002, by and between
Synagro Technologies, Inc. and Robert Boucher
(Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
2001).(1)

10.20 -- Amendment No. 1 to Employment Agreement dated effective
February 1, 2002, by and between Synagro Technologies,
Inc. and Randall S. Tuttle (Incorporated by reference to
the Company's Annual Report on Form 10-K for the year
ended December 31, 2001).(1)

10.21 -- Third Amended and Restated Credit Agreement dated May 8,
2002, among Synagro Technologies, Inc., various
financial institutions, and Bank of America, N.A.
(Incorporated by reference to the Company's Form 10-Q
for the period ended March 31, 2002).

10.22* -- Amendment No. 3 to Employment Agreement dated effective
December 30, 2003, by and between Synagro Technologies,
Inc. and Ross M. Patten. (1)

10.23* -- General Release dated effective December 30, 2003,
executed and delivered by Ross M. Patten in favor of
Synagro Technologies, Inc. (1)

21.1* -- Subsidiaries of Synagro Technologies, Inc.

23.1* -- Consent of Independent Accountants

31.1* -- Section 302 Certification of Chief Executive Officer

31.2* -- Section 302 Certification of Chief Financial Officer

32.1* -- Section 906 Certification of Chief Executive Officer

32.2* -- Section 906 Certification of Chief Financial Officer